Cost-Volume-Profit Analysis

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ACC 561

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®.

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Explanation & Answer

Attached, please review. if you have any question kindly ask

Memo
In the production of goods and services, both fixed costs and variable costs add up to the total
production costs. Fixed costs are costs that are deemed unchangeable regardless whether a
company produces or not. Examples of fixed costs are cost of electricity and rent. Variable costs
change depending on the demand and environment. To make profits in an organization, revenue
share must be greater than costs of production. As such, like any other company, for Bargain shore
store to make profits, the total revenue figure must exceed the costs of production (fixed costs plus
variable costs). Break-even point is the point at which production costs are at equilibrium with the
company revenues. In other words, when the company is operating at break-even, it means the
company is neither making losses nor making profits. According to Christine (2015), at break
even, fixed costs of production is equal to contribution (sales less variable costs). Essentially,
before Mary’s ideas of installing new lighting system and increased display space are incorporated,
the fixed costs stood at $270,000 while variable cost remained at $24 per pair of shoe. From the
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Anonymous
Just what I was looking for! Super helpful.

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