## Description

# Cost-Volume-Profit Analysis

**Purpose of Assignment**** **

The Case Study focuses on CVP (Cost-Volume-Profit), break-even, and margin of safety analyses which allows students to experience working through a business scenario and applying these tools in managerial decision making.** **

**Assignment Steps**** **

**Resources: **Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)

Tutorial help on Excel^{®} and Word functions can be found on the Microsoft^{®} Office website. There are also additional tutorials via the web offering support for Office products.

**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/computations using Microsoft^{®} Word or Excel^{®}.^{ }

**Format** your assignment consistent with APA guidelines.

**Click **the Assignment Files tab to submit your assignment.

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## Explanation & Answer

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Running head: COST-VOLUME PROFIT ANALYSIS

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COST VOLUME PROFIT ANALYSIS

(NAME)

(COURSE)

(DATE)

COST VOLUME PROFIT ANALYSIS

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Introduction

The advertising manager of Bargain Shoe Store, Mary Willis, has had several ideas to

include the sales of the company. These ideas include both introducing a new lightning system to

increase the visibility of the shoes sold by the company and decreasing their price. The expected

outcome of such ideas is that the sales volume of the shoes will increase by 20%.

However, the management team of the company is concerned because the

implementation of such ideas would also increase the fixed costs and decrease the income from

sales. As a result, they believe that these ideas might affect the break-even point of the company

and the margin of safety and are thus reluctant to accept them unless an accurate cost-volume

profit analysis clearly demonstrates their viability.

Calculation of the current break-even point and the new one assuming Mary’s ideas were

implemented

The calculation of the break-even point enables the management team of the company to

know how many shoes they should sell to be able of covering both its fixed and variable

expenses. Thus, at the break-even point, the following equation applies:

𝐹+𝑉∗𝑄 = 𝑃∗𝑄

where F represents the fixed costs, V the variable costs for each unit, P the selling price of each

unit and Q the number of units (Drury, 2014).

Rearranging this equation, it is possible to estimate the number of units that the company

needs to sell to achieve the break-even point as:

COST VOLUME PROFIT ANALYSIS

3

𝑄=

𝐹

𝑃−𝑉

According to the data provided, the selling price of each pair of shoes is of $40.00, the

variable expenses resulting from the manufacturing of each pair of shoes is of $24.00 and the

fixed expenses are of $270,000. The resulting current break-even point would then be:

𝑄𝑐𝑢𝑟𝑟𝑒𝑛𝑡 =

270,000

= 16,875 𝑝𝑎𝑖𝑟𝑠 𝑜𝑓 𝑠ℎ𝑜𝑒𝑠

40 − 24

On the other hand, the selling price of each pair of shoes would decrease to $38.00 and

the fixed costs would increase to $294,000 assuming that Mary’s ideas were implemented. The

resulting new break-even point would then be of 21,000, which re...