Svetlana Pace 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 $36,320 in fixed costs to the $266,700 currently spent. In addition, Svetlana is proposing that a 5% price decrease ($41 to $39) will produce a 20% increase in sales volume (18,440 to 22,128). Variable costs will remain at $23 per pair of shoes. Management is impressed with Svetlana'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 margin of safety ratio for current operations and after Svetlana's changes are introduced.
b. Prepare a CVP income statement for current operations and after Svetlana's changes are introduced.