Cost-Volume-Profit Analysis

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.

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.

    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 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.

    • Complete calculations/computations using Microsoft Word or Excel.

     
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