Scenario: 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 $24,000 in fixed costs to the $270,000 in fixed costs currently spent. In addition, Mary 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 Mary’s ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.
Compute the margin of safety ratio for current operations and after Mary’s changes are introduced.
Fixed cost
Variable cost
Price before change
Current break even point
New fixed cost (increased)
New price (decreased)
Variable cost
$ 270.000,00
$
24,00
$
40,00
16875 pair of shoes
$ 294.000,00
$
38,00
$
24,00
New break even point
21000 pair of shoes
Sales volume
New sales volume
20.000
24.000
Current margin of safety ratio
16%
New margin of safety ratio
13%
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