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 $54,600 in fixed costs to the $399,000 currently spent. in addition, mary is proposing that a 5% price decrease ($60 to $57) will produce a 20% increase in sales volume (20,000 to 24,000). variable costs will remain at $36 per pair of shoes. management is impressed with mary’s ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. compute the current break-even point in units, and compare it to the break-even point in units if mary’s ideas are used. (round answers to 0 decimal places, e. g. 1,225.) current break-even point pairs of shoes new break-even point pairs of shoes

Current:

BEPunits                 16,625

BEPdollars           997,500

margin of safety 202,500

promotional campaing Scenario:

BEPunits                   21,600

BEPdollars            1,231,200

margin of safety     136,800

Explanation:

current fixed cost     399,000

additional fixed cost 54,600

total                           453,600

sales price to 57 from 60

variable cost 36

contribution margin 60-36 = 24

scenario contribtuion margin = 57-36 = 21

BEP

current break even point

399,000/24 = 16,625

scenario BEP

453,600 / 21 = 21,600

Difference:

21,600 - 16,625 = 4,975

margin of safety:

current sales revenue 60 x20,000 = 1,200,000

bep sales revenue       60 x 16,625 =   (997,500)

current margin of safety                       202,500

scenario sales revenue 57 x 24,000 =   1,368,000

scenario bep                  57 x 21,600 =   (1,231,200)

scenario margin of safety                           136,800

Difference

136,800 - 202,500 = -65,700

After the promotional campaing, the BEP increase and the margin of safety decrease. The management concers are true, this campain has some impact in the company stability.