Question

Mary Willis is the advertising manager for Sheffield 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 $24,600 in fixed costs to the $128,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($20 to $19) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $12 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. Collapse question part (a) 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

Answer 1

Answer:

If Mary's idea is implemented the break-even point would increase from 16,000 units to 21,800 units

Explanation:

The break-even point is the level of activity where a business makes no profit or loss. At this level of activity, the total contribution equals the total fixed costs.

To calculate the break even point in units, we use the formula below:

Break-even point = Fixed cost for the period / selling price - variable cost

Current break-even point = 128,000/(20-12)

                                      = 16,000  units

With Mary's idea, the break-even point will be

New break-even point = ( 128,000+ 24600)/(19-12)

                                    = 21,800  units

If Mary's idea is implemented the break-even point would increase from 16,000 units to 21,800 units