Homework: Cost-Volume-Profit Analysis
Purpose of Homework
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.
Scenario: Jessica Cox is the advertising manager for Specialty Shoes. 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, Jessica 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 Jessica's ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.
Task
Complete the following:
1. Compute the current break-even point in units, and compare it to the break-even point in units if Jessica's ideas are used.
2. Compute the margin of safety ratio for current operations and after Jessica's changes are introduced (Round to nearest full percent).
3. Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Jessica's changes are introduced.
4. Prepare a maximum 500-word informal memo to management addressing Jessica's suggested changes.
5. Explain whether Jessica's changes should be adopted. Why or why not? Analyze the your calculations (three bullet points above) and use this information to support your suggestion.
Format your homework according to the give formatting requirements:
1. The answer must be double spaced, typed, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the homework, the course title, the student's name, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.