The advertising manager for JP Inc, a manufacturer of women's' shoes, 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 $34,000 in fixed costs to the $270,000 currently spent by the company. In an effort to increase sales volume the advertising manager is also proposing a 5% price decrease from the current selling price of $40 per pair of shoes. The company is currently selling 20,000 pairs of shoes and expects that these changes would bring a 20% increase in the number of shoes sold. The current variable costs for a pair of shoes are $22 and management expects this figure to remain unchanged.
Management is impressed with the advertising manager's initiative and ideas but is concerned about the effects these changes will have on company profits, break-even point and margin of safety.
Requirements
- Using Microsoft Excel prepare a contribution margin income statement based on the company's current operations. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:
- Break even in units sold
- Break even in dollars
- Margin of safety in units
- Margin of safety in dollars
- Using Microsoft Excel prepare a contribution margin income statement based the advertising managers recommendations. Include formulas. The income statement should be properly formatted and include sales, variable costs and contribution margin in total and also on a per unit basis. Right below the income statement calculate the following based on the current operations:
- Break even in units sold
- Break even in dollars
- Margin of safety in units
- Margin of safety in dollars
- Using Microsoft Word explain whether or not these changes should be made. Do in a memo format.