Bargain Shoe Store: CVP Analysis, Break-Even, and Margin of Safety

This case study examines the financial implications of a promotional campaign proposed by the advertising manager, Mary Willis, for the Bargain Shoe Store. The analysis involves a comprehensive evaluation using Cost-Volume-Profit (CVP) analysis, break-even point calculations, and margin of safety ratios to assess the impact of the proposed changes on the company's profitability. The assignment computes the current break-even point and compares it to the break-even point if Mary's ideas are implemented, calculates the margin of safety ratio for both scenarios, and prepares CVP income statements to evaluate the net profit under both current operations and the proposed changes. The evaluation reveals that while the promotional campaign might increase sales volume, it also increases the break-even point and decreases the margin of safety, ultimately leading to a reduction in net profit, thus making the adoption of the new idea unfavorable for the business. The analysis also includes references to relevant academic sources supporting the methodologies used.

1
Accounting

2
Table of Contents
Memorandum.............................................................................................................................3
Breakeven approach...............................................................................................................3
Margin of safety ratio.............................................................................................................3
CVP income statement...........................................................................................................4
Evaluation of idea..................................................................................................................5
References..................................................................................................................................6

3
Memorandum
To: Management
From: Advertising manager
Date: 1st March 2020
Subject: New promotional campaign evaluation
The bargain shoe store is involved in the shoes business and in that there is a
promotional campaign which is proposed to be undertaken by Mary Willis who is an
advertising manager. In this, there is a campaign which is offered by Mary and due to that,
there will be various changes that will be incorporated in the complete process. Before
accepting the offer it is required that there shall be a proper evaluation which shall be made in
this respect. This will be performed with the help of various techniques and tools which are
available.
Breakeven approach
The major approach which can be used is the identification of breakeven point. This is
the point at which the business will be producing that many units at which there will be no
profits or losses (Alnasser et al., 2014). At this level, the business will be recovering the cost
only which has been incurred in the process of production. This is identified to ascertain the
minimum level at which the production shall be carried. With the help of this, the proper
analysis will be performed to undertake the best possible decision which will be in the benefit
of business (Da Costa et al., 2016). The calculation for the same is performed and shown
below by which proper understanding will be gained. The formula which is used to ascertain
the breakeven point is (fixed cost/contribution per unit) and the same will be used in the
given case.
The margin of safety ratio
In addition to this, there is an important approach that is used and that is the margin of
safety ratio. In the business, all the units which are produced in actual above the breakeven
point are considered as the margin of safety (Komljenovic et al., 2017). This is because all of
them will be gaining profit which is essential for any business. The ratio of the excessive

4
units above breakeven and actual units is considered as the margin of safety ratio. This is
ascertained with the help of an important formula which is as follows:
The margin of safety ratio = (Actual sales – breakeven sales)/actual sales*100
All the calculations have been made by using the same formula and the results of that
are shown hereunder which will help in taking the best possible decision.
Particulars Current Mary's idea
Fixed cost 270000 294000
Selling price 40 38
Sales volume 20000 24000
Variable cost 24 24
Contribution per unit 16 14
Breakeven point 16875 21000
The margin of safety ratio 16% 13%
CVP income statement
The income statement is an important aspect of the financial statements by which the
net income that is made by the business is ascertained. In the given case it will be made with
the CVP method in which the cost volume and profit will be represented adequately to
understand the relationship that exists among them. There will be consideration of the units
which are sold by which the sales value will be identified and then the variable cost which is
incurred in relation to those units is taken into account (Armean & Ardeleanu, 2017). The
total variable cost is reduced from the sales value by which the contribution that is made is
identified. After this, the total fixed cost which has been incurred in the process is identified
and accounted for. By the deduction of fixed cost from contribution to the final profit which
is made is ascertained. The manner in which this is performed is shown below by which the
complete process will be understood in an appropriate manner.
Particulars Current Mary's idea
Sales units 20000 24000
Sales 800000 912000
Variable cost 480000 576000
Contributio
n
320000 336000
Fixed cost 270000 294000
Net profit 50000 42000

5
Evaluation of idea
The various calculations are made and it can be noted that with the incorporation of
Mary’s idea there is an increase in the break-even units from 16875 to 21000. At this level, it
will be required to sell more shoes in order to recover the cost. After that, the margin of
safety is ascertained which is reducing from 16% to 13% and that is not beneficial for the
business as there will be an adverse impact on the overall profitability. The income statement
is made and it can be noted that the profit of the business is reducing from 50000 to 42000
which against the interest of the business. Due to all of these results, the adoption of a new
idea is not suggested and shall not be incorporated.

6
References
Alnasser, N., Shaban, O. S., & Al-Zubi, Z. (2014). The Effect of Using Break-Even-Point in
Planning, Controlling, and Decision Making in the Industrial Jordanian
Companies. International Journal of Academic Research in Business and Social
Sciences, 4(5), 626.
Armean, D., & Ardeleanu, M. L. (2017). Performance Management By Cvp
Analysis. Business Excellence and Management, 7(2), 72-93.
Da Costa, D. G. N., Malkhamah, S., & Suparma, L. B. (2016). Use of the safety factor and
margin of safety in motorcyclist accident risk management. International Journal of
Technology, 9, 737-750.
Komljenovic, D., Loiselle, G., & Kumral, M. (2017). Organization: A new focus on mine
safety improvement in a complex operational and business environment. International
Journal of Mining Science and Technology, 27(4), 617-625.