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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.
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
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
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