The Case Study Focuses On Cvp (Cost-Volume-Profit)

Cost-Volume-Profit AnalysisNameInstitutional affiliation Cost-Volume-Profit AnalysisAs the advertising manager, Mary Willis has analyzed the current sales volume of the company, and realized that Bargain Shoe Store could sell more units of products if the company made some marketing changes. First, Willis suggests that the store should install a new lighting system. Secondly, the company should increase its display space. The two changes would increase the fixed costs from by $24,000 from the current $270,000. Willis also wants a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). However, the variable costs will remain at $24 per pair of shoes. Although the idea seems impressive, after a deeper analysis, it is evident that the company’s net income would reduce following the radical changes. The management should therefore reject the proposal as it is. The changes proposed by the advertising manager would result in higher sales. However, sales are not the best measure of financial performance. A better approach is to use the margin of safety ration. The margin of safety was popularized by Benjamin Graham, and it measures the room for error that