Question

Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (22,500 units at $30 per unit) Less: Variable expenses $675,000 472,500 Contribution margin Less: Fixed expenses 202,500 211,500 Net operating loss $ (9,000) Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. Contribution margin ratio Break-even point in units Break-even point in dollars 30 % 23,500 705,000 $ 2. The sales manager feels that an $26,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $160,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.) Increase in monthly net operating income | $ 22,000

Answer 1

1.CM Ratio = Contribution Margin/Sales

= 202,500/675,000

= 30%

Break even point in unit sales = Fixed costs/Contribution Margin per unit

= 211,500/9

= 23,500 units

Dollar sales = 211,500/30%

= $705,000

2.Increase in Net Operating Income = Increase in Contribution Margin – Increase in cost

= 160,000*30% - 26000

= $22,000

3.

Contribution format Income Statement
Sales	1,215,000
Less: Variable expenses	945,000
Contribution Margin	270,000
Less: Fixed Expenses	286,500
Net Operating Loss	(16,500)

4.Target Profit = $9500

Fixed costs = 211,500

Target Contribution Margin = $221,000

Units required to be sold = 221,000/(30-21-0.5)

= 26,000 units

5.CM Ratio = (30-10.5)/30 = 65%

Break even point in unit sales = (211,500+81,000)/19.5 = 15,000 units

Dollar sales = 292,500/65%

= $450,000

b.

	Without Automation			With Automation
	Per unit	Total	%	Per unit	Total	%
Sales	30	810,000	100.00%	30	810,000	100.00%
Variable expenses	21	567,000	70.00%	10.5	283,500	35.00%
Contribution Margin	9	243,000	30.00%	19.5	526,500	65.00%
Fixed Expenses	7.83333333	211,500	26.11%	10.8333	292,500	36.11%
Net operating income	1.16666667	31,500	3.89%	8.66667	234,000	28.89%

Yes, should automate