Ch 5 & 6 CVP HW2.docx - Problem 5-4A Mary Willis is the...

Problem 5-4A
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 currently spent. In addition, Mary
is proposing that 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 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.)
Compute the margin of safety ratio for current operations and after Mary’s changes are
introduced. (Round answers to 0 decimal places, e.g. 15%.)

Prepare a CVP income statement for current operations and after Mary’s changes are introduced.
Exercise 6-14
The CVP income statements shown below are available for Armstrong Company and Contador
Company.
Armstrong
Co.
Contador
Co.
Sales $500,000 $500,000
Variable costs 240,000 50,000
Contribution
margin
260,000 450,000
Fixed costs 160,000 350,000
Net income $100,000 $100,000
(a) Compute the degree of operating leverage for each company.