Cost volume Profit

Scenario: Jessica Cox is the advertising manager for Specialty Shoes. 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, Jessica
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 Jessica’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 Jessica’s
ideas are used.
Compute the margin of safety ratio for current operations and after Jessica’s changes are introduced
(Round to nearest full percent).
Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Jessica’s changes
are introduced.
Prepare a maximum 500-word informal memo to management addressing Jessica’s suggested changes.
Explain whether Jessica’s changes should be adopted. Why or why not? Analyze the your calculations
(three bullet points above) and use this information to support your suggestion.

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