Description
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.
Explanation & Answer
Hello,Please find the solution attached. If you have any questions, please do not hesitate to ask; if all is clear please review and rate the serviceAll the best
MEMO
To: Management
From: Accountant
Re: Mary Willis’ Proposed Changes (CVP Analysis)
Please note that I have conducted a “Cost-Volume-Profit” (CVP) analysis of the changes Mary
Willis have proposed and arrived at a recommendation as explained below.
Costs:
Bargain Shoe Store has two types of costs, Variable and Fixed Costs.
A) Variable Costs:
Those are the costs that do not change on a per unit basis, yet vary in total with changes in the
levels of activity.
Currently, the variable cost per unit is $24 and would not change as a result of the changes
proposed by Mary.
B) Fixed Costs:
Those are costs that change on a per unit basis; yet do not change in total. Mary’s proposal of
the installation of a new lighting system and increased display space would add an additional
$24,000 which would increase fixed costs from a current level of $270,000 to $294,000
(approximately 9% increase).
This increase in fixed costs coupled with the suggested 5% decrease in price (from $40 to $38)
would cause the unit contribution margin to decrease from the current level of $16 to $14 (a
12.5% decrease).
This decrease in unit price suggested by Mary would lead to an increase in sales volume from
the current level of 20,000 units to 24,000, which would cause the total contribution margin to
increase by $16,000 (from a current contribution margin of $320,000 to $336,000 if changes are
implemented).
“Contribution marg...
