Answered: Catherine is the advertising manager…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 6PB: Karens Quilts is considering the purchase of a new Long-arm Quilt Machine that will cost $17,500 and...

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Question

Catherine is the advertising manager for Super Shoes limited. 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 Ksh 2,400,000 in fixed costs to the Ksh 27,000,000 in fixed costs currently spent. In addition, Catherine is proposing a 5% price decrease from the current Ksh 4,000 per pair and this is expected to produce a 30% increase in sales volume from the current 20,000 pairs. Variable costs will remain at Ksh 2,400 per pair of shoes. Management is impressed with Mary's ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.

Required

Compute the current break-even point in units, and compare it to the break-even point in units if Catherine’s ideas are used
Compute the margin of safety ratio for current operations and after Catherine’s changes are introduced

Prepare a C-V-P analysis profit statement for current operations and after Catherine’s changes are introduced

Prepare a memo to management addressing Catherine’s suggested changes and explain whether Catherine’s changes should be adopted
What are the limitations of the technique you have used to solve parts i) to iii) above?

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