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
- Cost-Volume-Profit Analysis Grading Guide
- 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.
