Problem: Mary Wills 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 $27,120 in fixed costs to the $279,940 currently spent. In addition, Mary is proposing that a 5% price decrease ($44 to $42) will produce an 18% increase in sales volume (21,250 to 25,075). Variable costs will remain at $28 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.