Purpose Of Assignment: The Case Study Focuses On CVP 363350

Purpose Of Assignmentthe Case Study Focuses On Cvp Cost Volume Profit

The assignment involves analyzing the impact of proposed changes in fixed costs and pricing on the break-even point, margin of safety, and profitability for Bargain Shoe Store. Students are required to compute the current and projected break-even points, determine the margin of safety ratios before and after the proposed changes, prepare CVP income statements for both scenarios, and write an informal APA-formatted memo advising management on whether to accept Mary Willis's proposals based on their financial implications.

Paper For Above instruction

The purpose of this assignment is to evaluate managerial decision-making through the analysis of Cost-Volume-Profit (CVP) concepts, specifically focusing on break-even analysis, margin of safety, and profitability projections. The case centers around Bargain Shoe Store, where the advertising manager, Mary Willis, has proposed strategic changes intended to boost sales and revenue. These changes involve an increase in fixed costs due to new lighting and display enhancements, as well as a slight reduction in selling price aimed at increasing sales volume. This scenario provides a practical context for students to apply CVP analysis tools to inform managerial decisions.

Initially, it is essential to understand the current operational cost structure. The store incurs fixed costs of $270,000, with variable costs of $24 per pair of shoes, and currently sells shoes at $40 per pair. Given these figures, the current break-even point in units can be calculated by dividing total fixed costs by the contribution margin per unit. The contribution margin per unit is obtained by subtracting variable costs from sales price, which is $40 - $24 = $16. Therefore, the current break-even point is $270,000 / $16 = 16,875 units.

Mary’s proposal involves an increase in fixed costs by $24,000, raising total fixed costs to $294,000 ($270,000 + $24,000). Simultaneously, she recommends decreasing the selling price to $38 per pair, with an expected sales volume increase from 20,000 to 24,000 units, reflecting a 20% sales volume rise with a 5% price reduction. The variable costs remain constant at $24 per unit, making the new contribution margin $14 ($38 - $24). The new break-even point in units can be calculated as $294,000 / $14 ≈ 21,000 units. This indicates a higher break-even threshold due to increased fixed costs and reduced unit contribution margin, which must be carefully considered.

The margin of safety ratio measures how much sales can decline before reaching the break-even point. Currently, with sales of 20,000 units and a break-even of 16,875 units, the margin of safety is (20,000 - 16,875) / 20,000 ≈ 15.6%. After changes, with projected sales of 24,000 units and a break-even point of approximately 21,000 units, the margin of safety becomes (24,000 - 21,000) / 24,000 ≈ 12.5%. The reduction in the margin of safety suggests increased risk associated with the proposed changes, as there is less cushion before losses occur.

Creating CVP income statements for both scenarios provides insight into how profit levels are affected. The current CVP income statement displays total sales of 20,000 units $40 = $800,000, with variable costs of $24 20,000 = $480,000, contribution margin of $320,000 and fixed costs of $270,000, resulting in a profit of $50,000. Under the proposed changes, sales would be 24,000 units $38 = $912,000; variable costs amount to $24 24,000 = $576,000; contribution margin is $336,000. Deducting fixed costs of $294,000 leaves a projected profit of $42,000. These figures indicate that although revenue increases, the profit margin narrows due to higher fixed costs and lower unit contribution margin.

Based on this analysis, a management memo needs to be prepared to advise whether these strategic modifications are advantageous. The key considerations include the higher sales volume that could offset the increased fixed costs, the decline in contribution margin per unit, and the reduced margin of safety. While the additional sales might enhance total revenue, the decrease in profit margins and increased risk might not justify the investment. The decision should balance the potential for increased market share against the financial risks associated with lower contribution margins and tighter safety margins.

In conclusion, this CVP analysis underscores the importance of understanding operational leverage and the impact of fixed and variable costs on profitability. Managers must weigh the benefits of increased sales against the risks posed by slightly reduced profit margins and a narrower safety cushion. Careful financial modeling, as demonstrated, provides critical insights enabling informed strategic decisions. Therefore, based on the current and projected financial metrics, management should consider whether the anticipated sales increase compensates for the reduced contribution margin and elevated fixed costs before adopting Mary Willis's proposals.

References

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