Kay Jo is the advertising manager for Costless 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 $210,000 currently spent. In addition, Kay is proposing that a 62/3% price decrease (from $30 to $28) will produce an increase in sales volume from 16,000 to 20,000 units. Variable costs will remain at $15 per pair of shoes. Management is impressed with Kay’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.
Instructions
(a) Compute the current break-even point in units, and compare it to the break-even point in units if Kay’s ideas are used.
(b) Compute the margin of safety ratio for current operations and after Kay’s changes are introduced.
(c) Prepare a CVP income statement for current operations and after Kay’s changes are introduced. Would you make the changes suggested?