Question 11 of 11 - / 0.03 View Policies Current Attempt in Progress Michelle 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 spac that will add \( \$ 22,000 \) in fixed costs to the \( \$ 286,000 \) currently spent. In addition, Michelle 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 Michelle's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety. (a) Prepare a CVP income statement for current operations and after Michelle's changes are introduced. BARGAIN SHOE STORE CVP Income Statement Current \$ \( \square \) \( \square \) \( \square \) \( \square \) \$ \( \square \) New \$ \( \square \) \( \square \) \( \square \) \( \square \) \$ \( \square \) eTextbook and Media

We start by computing the numbers for both the current operations and after Michelle’s proposed changes. Step 1. Current Operations • Sales price = $40 per pair • Volume = 20,000 pairs • Variable cost = $24 per pair • Fixed costs = $286,000 Calculations: 1. Sales = 20,000 × $40 = $800,000 2. Variable expenses = 20,000 × $24 = $480,000 3. Contribution margin = Sales − Variable expenses = $800,000 − $480,000 = $320,000 4. Net operating income = Contribution margin − Fixed costs = $320,000 − $286,000 = $34,000 Step 2. New Proposal • New sales price = $38 per pair (a 5% decrease) • New volume = 24,000 pairs (a 20% increase) • Variable cost remains = $24 per pair • New Fixed costs = Current fixed costs + Additional fixed costs = $286,000 + $22,000 = $308,000 Calculations: 1. Sales = 24,000 × $38 = $912,000 2. Variable expenses = 24,000 × $24 = $576,000 3. Contribution margin = Sales − Variable expenses = $912,000 − $576,000 = $336,000 4. Net operating income = Contribution margin − New fixed costs = $336,000 − $308,000 = $28,000 Step 3. Prepare the CVP Income Statements BARGAIN SHOE STORE CVP Income Statement Current Operations:  Sales:          $800,000  Less: Variable expenses:   $480,000  Contribution Margin:     $320,000  Less: Fixed expenses:     $286,000  Net Operating Income:    $34,000 New Proposal:  Sales:          $912,000  Less: Variable expenses:   $576,000  Contribution Margin:     $336,000  Less: Fixed expenses:     $308,000  Net Operating Income:    $28,000 This completes the CVP statements comparing the current situation to the new proposal by Michelle.