Question

Due to erratic sales of its sole product - a high-capacity battery for laptop computers - PEM Ltd has been experiencing difficulty for some time. The company's statement of profit or loss for the most recent month is given below: Sales (19,500 units x €30) Less variable expenses Contribution margin Less fixed expenses € 585,000 € 409,500 € 175,500 € 180,000 € (4,500) Loss Required 1. Compute the company's CM ratio and its break-even point in both units and Euros. 2. The president believes that a € 16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an € 80,000 increase in monthly revenue. If the president is right, what will be the effect on the company's monthly profit or loss? (use an incremental approach in preparing your answer). Refer to the original data presented: The sales manager is convinced that a 10 % reduction in the selling price, combined with an increase of € 60,000 in the monthly advertising budget will cause unit sales to double. What will the new statement of profit or loss look like if these changes are adopted? Refer to the original data presented: The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 pence per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of € 9,750? 4 Pofa.

Answer 1

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PEM Ltd.
Answer 1
Sales	585,000.00
Contribution margin	175,500.00
CM Ratio	30.00%
Contribution margin	175,500.00
Units sold	19,500.00
Contribution margin per unit	9.00
Fixed expenses	180,000.00
Break even units	20,000.00
Sell price	30.00
Break even sales	600,000.00
Answer 2
Increase in sales	80,000.00
CM Ratio	30.00%
Contribution margin	24,000.00
Less: Advertising expense	16,000.00
Increase in monthly profit	8,000.00
Answer 3
Current sell price	30.00
Reduction by 10%	3.00
Revised sell price	27.00
Current units	19,500.00
Revised units	39,000.00
Revised sale value	1,053,000.00
Current Variable expense	409,500.00
Current units	19,500.00
Current Variable expense per unit	21.00
Revised Variable expenses	409,500.00
Income Statement
Sales	1,053,000.00
Less: Variable expense	409,500.00
Contribution margin	643,500.00
Less: Fixed expense	180,000.00
Less: Adverting expense	60,000.00
Net profit	403,500.00
Answer 4
Current Variable expense per unit	21.00
Add: packing cost	0.75
Revised Variable expense per unit	21.75
Sell price	30.00
Revised Variable expense per unit	21.75
Revised Contribution per unit	8.25
Fixed expenses	180,000.00
Add: Target profit	9,750.00
Target Contribution	189,750.00
Units to be sold	23,000.00
Target Contribution/ Revised Contribution per unit