Purpose Of Assignment: The Case Study Focuses On CVP Cost Vo

Purpose Of Assignmentthe Case Study Focuses On Cvp Cost Volume Profit

The case study focuses on CVP (Cost-Volume-Profit), break-even, and margin of safety analyses. It requires students to work through a business scenario and apply these tools in managerial decision-making, including calculations and analysis related to a proposed promotional campaign affecting fixed costs, sales volume, pricing, and variable costs.

Mary Willis, advertising manager for Bargain Shoe Store, proposes implementing new lighting and display enhancements that will add $24,000 to fixed costs existing at $270,000. She also suggests a 5% price reduction from $40 to $38 per pair of shoes, which is expected to increase sales volume by 20% from 20,000 to 24,000 pairs. Variable costs per shoe remain at $24. Management is concerned about the impact of these changes on the break-even point and margin of safety.

The assignment involves the following tasks:

• Calculate the current break-even point in units and compare it to the break-even point after implementing Mary's ideas.
• Compute the margin of safety ratio for current operations and after the proposed changes, rounding to the nearest full percent.
• Prepare CVP income statements for current operations and post-change scenarios.
• Write a maximum 700-word informal memo to management evaluating whether the proposed changes should be adopted, supporting your position with the calculations and analysis from the previous steps.

Use Microsoft® Word or Excel® for all calculations, formatting according to APA guidelines.

Paper For Above instruction

The decision of whether to adopt Mary Willis’s proposed changes at Bargain Shoe Store hinges on a detailed analysis of their impact on the company’s financial health, particularly focusing on the break-even point, margin of safety, and profitability as indicated by CVP analysis. This paper provides a comprehensive assessment of these elements, examining the current operational state and evaluating the prospective effects of the proposed promotional and pricing strategies.

Current Financial and Operational Overview

Initially, it is essential to understand the existing baseline. The current fixed costs are $270,000, with variable costs of $24 per pair of shoes. The current selling price is $40 per pair, and the current sales volume is 20,000 pairs. The contribution margin per unit is calculated as selling price minus variable costs, which is $16 ($40 - $24). Using this, the current break-even point in units is derived by dividing fixed costs by contribution margin:

Current break-even units = $270,000 / $16 = 16,875 pairs.

Impact of Mary’s Proposed Changes

Mary’s proposal involves increasing fixed costs by $24,000 due to new lighting and displays, bringing total fixed costs to $294,000 ($270,000 + $24,000). She suggests reducing the price to $38, which should stimulate a 20% increase in sales volume, from 20,000 to 24,000 pairs. The variable cost per unit remains at $24, and the new contribution margin per unit is $14 ($38 - $24).

The new break-even point in units can be calculated as:

New break-even units = $294,000 / $14 ≈ 21,000 pairs.

This indicates that under the new scenario, the company needs to sell approximately 21,000 pairs to break even, which is higher than the current break-even volume. This increase reflects the higher fixed costs and slightly reduced per-unit contribution margin.

Margin of Safety Analysis

The margin of safety (MOS) quantifies how much sales can decline before the business reaches its break-even point. It is calculated by subtracting the break-even sales units from actual or projected sales units, then dividing by the projected sales units, and converting to a percentage.

For current operations:

MOS = (20,000 - 16,875) / 20,000 ≈ 0.15625 or 16%.

For the proposed scenario:

MOS = (24,000 - 21,000) / 24,000 = 3,000 / 24,000 ≈ 0.125 or 13%.

Thus, the margin of safety decreases from 16% to 13% with the proposed changes, indicating a slightly higher risk of operating below break-even if sales decline.

CVP Income Statements

Constructing CVP income statements helps visualize profitability under both scenarios. Assuming total sales are volume times price:

• Current Sales Revenue = 20,000 units × $40 = $800,000.
• Variable costs = 20,000 × $24 = $480,000.
• Contribution margin = $800,000 - $480,000 = $320,000.
• Fixed costs = $270,000.
• Profit before taxes = $320,000 - $270,000 = $50,000.

Post-change scenario:

• Projected sales revenue = 24,000 × $38 = $912,000.
• Variable costs = 24,000 × $24 = $576,000.
• Contribution margin = $912,000 - $576,000 = $336,000.
• Fixed costs = $294,000.
• Profit before taxes = $336,000 - $294,000 = $42,000.

While profit diminishes slightly after the changes, the company maintains profitability and increased sales volume.

Evaluation of the Proposed Changes

The core consideration centers on whether the strategic benefits outweigh the risks. The increased fixed costs and decrease in per-unit selling price lead to a higher break-even point and a lower margin of safety, which could threaten profitability if sales decline. However, the increase in sales volume to 24,000 units compensates for some of this risk, allowing the company to generate a positive profit even after the changes.

From a managerial perspective, the decreased contribution margin per unit ($16 to $14) suggests reduced profit per sale, but the higher sales volume may offset this. Nonetheless, the decrease in the margin of safety from 16% to 13% indicates increased vulnerability to sales fluctuations, which should be carefully considered.

Adopting the changes could be beneficial if the company can ensure sustained sales at or above projected levels. The promotional campaign’s potential to attract new customers or increase brand visibility may lead to long-term benefits that justify the short-term financial adjustments.

Conversely, if market conditions are uncertain or if sales decline, the business may face financial strain because of the higher fixed costs and lower contribution margin. Therefore, a conservative approach might be to proceed with caution, perhaps implementing the changes in phases or with performance targets to monitor impact closely.

Conclusion

In summary, while Mary’s proposed changes increase fixed costs and lower per-unit profit margins, the higher sales volume could sustain profit levels and contribute to growth. The decision hinges on confidence in maintaining or exceeding projected sales figures. Given the analyses, if the company believes in its capacity to achieve the increased sales volume, adopting the changes appears viable, with careful risk management. Otherwise, maintaining current operations might be safer until sales growth is more certain.

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