Bargain Shoe Store. Memo on Suggested Company Changes
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.
Assignment Steps
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 600- 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.
Complete calculations/computations using Microsoft Word or Excel.
(I did the calculations and attached it in a file)
|
Current |
New |
|||
|
Unit Selling price |
40 |
38 |
||
|
Less: variable costs |
24 |
24 |
||
|
Unit contribution |
16 |
14 |
||
a.) Break-even point = Fixed costs/Unit contribution
Current break-even point=$270,000/16 = 16,875
New break-even point=($270,000 + $24,000)/14 =21,000
b.) Margin of Safety ratio = (Total sales-Break even sales)/Total sales)
Current margin of safety ratio = (20000-16,875)/20000=15.63%
New margin of safety ratio = (24000-21,000)/24000=12.5%
c.)
|
CVP Income statement
|
BARGAIN SHOE STORE
INTERNAL MEMO
TO: Management
FROM:
DATE: 20th November 2019
SUBJECT: PROMOTIONAL CAMPAIGN TO IMPROVE COMPANY SALES
I wish to bring to your attention that Mary Willis, the advertising manager had proposed a promotional campaign that would lead to an increase on the sales volume of our company. She had suggested the following;
* Installation of a new lighting system and display size that will cause an increase of the fixed costs by $24,000 from the present $270,000
* Price decrease of 5% (From $40 to $38) to increase sales volume by 20% (from $20,000 to $24,000).
I carried out an analysis of Mary’s suggestions and realized that they would have a great impact on the operations of the company as shown below.
Current
New
Unit Selling price
40
38
Less: variable costs
24
24
Unit contribution
16
14
* Break-even point = Fixed costs/Unit contribution
Current break-even point=$270,000/16 = 16,875
New break-even point= ($270,000 + $24,000)/14 =21,000
* Margin of Safety ratio = (Total sales-Break even sales)/Total sales)
Current margin of safety ratio = (20000-16,875)/20000=15.63%
New margin of safety ratio = (24000-21,000)/24000=12.
*
CVP Income statement
CurrentProposedSelling price per unit$40$38Less: Variable cost per unit$24$24Contribution per unit (C)$16$14Units sold (U)20,00024,000Total contribution (C × U)$320,000$336,000Less: Fixed cost$270,000$294,000Profit$50,000$42,000
👀 Other Visitors are Viewing These APA Essay Samples:
-
Final Corporation Finance Question Accounting, Finance Coursework
10 pages/≈2750 words | No Sources | APA | Accounting, Finance, SPSS | Coursework |
-
Capital Structure and its Key Elements
10 pages/≈2750 words | No Sources | APA | Accounting, Finance, SPSS | Coursework |
-
Data Management Using Excel Sheets
2 pages/≈550 words | No Sources | APA | Accounting, Finance, SPSS | Coursework |