Reference no: EM132565113

Scenario:

Jessica Cox is the advertising manager for Specialty Shoes. 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, Jessica 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 Jessica's ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.

Assignment Steps

Complete the following:

Question 1: Compute the current break-even point in units, and compare it to the break-even point in units if Jessica's ideas are used.

Question 2: Compute the margin of safety ratio for current operations and after Jessica's changes are introduced (Round to nearest full percent).

Question 3: Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Jessica's changes are introduced.

Question 4: Prepare a maximum 500-word informal memo to management addressing Jessica's suggested changes.

Question 5: Explain whether Jessica's changes should be adopted. Why or why not? Analyze the your calculations (three bullet points above) and use this information to support your suggestion.