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

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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.
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

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