Topic
Cost-Volume-Profit Analysis (Proposed Changes to Bargain Shoe Store)
Instructions
Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)
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Scenario: Mary Willis is the advertising manager for Bargain Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $24,000 in fixed costs to the $270,000 in fixed costs currently spent. In addition, Mary is proposing a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Mary’s ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.
Complete the following:
- Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used.
- Compute the margin of safety ratio for current operations and after Mary’s changes are introduced (Round to nearest full percent).
- Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Mary’s changes are introduced.
Prepare a maximum 700-word informal memo to management addressing Mary’s suggested changes.
- Explain whether Mary’s changes should be adopted. Why or why not? Analyze the above information (three bullet points above) and use this information to support your suggestion.
Show your work in Microsoft® Word or Excel®.
Complete calculations/
Format your assignment consistent with APA guidelines.
Answer Preview
The Income statement for the project shows the expected profit before and after Mary’s changes. The profit from the project before the changes is $50,000 while the profit after the changes is $42,000. Therefore, Bargain Shoe Store will make more money if it does not implement the changes.
Recommendations
Mary’s changes should not be adopted. They result in a higher break-even point units, a lower margin of safety, and a lower net profit before tax. In all the scenarios, Bargain Shoe Store’s operational and financial position will worsen if the changes proposed by Mary are implemented. The changes should not be implemented.
Word Count: 600