Cost Volume Profit Analysis
Purpose of Assignment
The Case Study focuses on CVP (Cost-Volume-Profit), break-even, and margin of safety analyses which allows students to experience working through a business scenario and applying these tools in managerial decision making.
Resources
- 1. Generally Accepted Accounting Principles (GAAP)
- 2. U.S. Securities and Exchange Commission (SEC)
- 3. Attached Grading Guide
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.
Assignment Steps
1. Complete the following:
- 1. Compute the current break-even point in units, and compare it to the break-even point in units if Mary’s ideas are used.
- 2. Compute the margin of safety ratio for current operations and after Mary’s changes are introduced (Round to nearest full percent).
- 3. Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Mary’s changes are introduced.
2. Create a maximum 700-word informal memo to management addressing Mary’s suggested changes in APA format.
- Explain whether Mary’s changes should be adopted. Why or why not? Analyze the above information (three bullet points above) and use this information to support your suggestion.
3. Show your work in Microsoft Word or Excel.
4. Complete calculations/computations using Microsoft Word or Excel.
5. Meet all content and writing expectations in the attached grading guide.
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2 |
Grading Guide
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Content |
Met |
Partially Met |
Not Met |
Comments: |
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Computed the current break-even point in units, and compared it to the break-even point in units if Mary’s ideas were used. |
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Computed the margin of safety ratio for current operations and after Mary’s changes were introduced (rounded to nearest full percent). |
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Prepared a CVP (Cost-Volume-Profit) income statement for current operations and after Mary’s changes were introduced. |
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Explained whether Mary’s changes should be adopted. Why or why not? Analyzed the information (first three rows above) and used the information to support student’s suggestion. |
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Showed work in Microsoft® Word or Excel®. Completed calculations/computations using Microsoft® Word or Excel®. |
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The informal memo is a maximum 700 words in length. |
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Total Available |
Total Earned |
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100 |
#/100 |
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Writing Guidelines |
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The paper—including tables and graphs, headings, title page, and reference page—is consistent with APA formatting guidelines and meets course-level requirements. |
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Intellectual property is recognized with in-text citations and a reference page. |
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Paragraph and sentence transitions are present, logical, and maintain the flow throughout the paper. |
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Sentences are complete, clear, and concise. |
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Rules of grammar and usage are followed including spelling and punctuation. |
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30 |
#/30 |