Problem

Mary 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 space that will add $32,400 in fixed costs to the $417,000 currently spent. In addition, Mary is proposing that a 5% price decrease ($60 to $57) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $36 per pair of shoes. Management is impressed with Mary's ideas but concerned about the effects that these changes will have on the break-even point and the margin of safety.

(a) Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used.

(b) Compute the margin of safety ratio for current operations and after Mary's changes are introduced.