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Problem
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 currently spent. In addition, Mary is proposing that 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 that these changes will have on the break-even point and the margin of safety.
a. Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used.
b. Compute the margin of safety ratio for current operations and after Mary's changes are introduced.
c. Prepare a CVP income statement for current operations and after Mary's changes are introduced. Would you make the changes suggested?
Then, imagine you are an investor or creditor; suggest the ratios that you believe would provide an investor or creditor with the most important information needed to make accurate predictions about the company's financial condition.
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Compute the current break-even point in units, and compare it to the break-even point in units if Jane's ideas are used.
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