Case 1 – Cost-Volume-Profit Analysis
Janet Jennings is the general manager for Mercashoe Store. Sheis currently working on a major promotional campaign. Her ideasinclude the installation of a new lighting system and increaseddisplay space that will add $24,000 in fixed costs to the existingfixed costs. In addition, Janet is proposing a 5% price decrease($40 to $38) that will produce a 20% increase in sales volume(20,000 to 24,000). Variable costs will remain at $24 per pair ofshoes. Management is impressed with Janet’s ideas but concernedabout the effects theses changes will have on the break-even pointand the margin of safety.
Information provided:
A. Rental expenses for the store: $5,000 per month.
B. Janet has a salary assigned of $60,000 per year.
C. The store has a sales manager who earns $45,000 per year.
D. There are three salesclerks who have a salary assigned of$25,000 each per year.
E. Social security expenses for each the employees represent 30%of their salary.
F. Utilities expense: $600 per month.
Instructions:
1. Compute the current break-even point in units and compare itto the break-even point in units if Janet’s ideas areimplemented.
2. Compute the contribution margin ratio under currentoperations and after Janet’s changes are introduced. (Round to thenearest full percent).
3. Compute the margin of safety under the two proposals.
4. What is the operating income under each scenario?
5. Prepare a CVP (Cost-Volume-Profit) income statement forcurrent operations and after Janet’s changes are introduced.
6. Prepare a Cost-Volume-Profit graph under the twoscenarios.
7. Prepare a report explaining and justifying whether Janet’schanges should be adopted or not and provide suggestions supportedby the information provided above. Show your work in Word ofExcel
