Question

Due to erratic sales of its sole product a high-capacity battery for laptop computers-PEM, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below. Sales (19,500 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 585,000 409,500 175,500 180,000 $ 4,500) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales 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 sales. If the president is right, what will be the increase (decrease) in the company's monthly net operating income? 3. Refer to the original data. 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 double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $9.750? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month, a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales b. Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are (Show data on a per unit and percentage basis, as well as in total, for each alternative) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 26,000)?

Answer 1

TI Selling price per Voit 30 G) variable cost per Unit di ($409,500 19500 Units Contoribution pero Unit Contribution margin saatio = -x100 - 9 x100 Break fren point in 30 z 30% Wnet sales - Fixed Cost Contribution . pero Brit $ 180,000 $9 20,000 Vnets, Sales dellas - Fixed cost Break Eren point in cm patio $ 180,000 307 = $600.000, usow the heat advertising budget increased by $16000 which will effect in $80,000 increases in the operating Sales. Now, we have to see whether it increase monthly operating income or not,

401500 870500 Tricome Statement 665000 409500 255500 Sales ($585000 $$80.000) ( variable expenses. Contribution Manager - - nelere de expenses & additional advertising expenses. 180,000 755000 16000 Net operating Income a 59500 So, & the president's decision is absolutely right. It will increase monthly net operating { Income.

Nove the sales manager convinced to d vreduce lo y of the selling price. 20 selling price peso Vnit us ($30-107.) = $27 It will increase the advertising budget by $60,000 and the double unit sales .. So total unit sales is 2x19500 = 39000 units. Income Statement Sales ( 39000 x $27) variakle expenses. - 1053000 409500 - fixed expenses! 643500 180,000 (-) additional advertising expenses, 463500 60,000 Met Operaling Income 403500 Yes, the sales manages is right, it will increase the net operating Income. I

the product bene The new product would grow. Sales It will increase the packaging Cost 75 cents pero unit and packaging in Cost included the variable cost pero Unet. So, Selling price = 300 per Unit variable Cost ? 3 21.75 (21 +0.75) 4. Contribution Margin $ 8.28 per Unit Required sales, to achiere a target profit $9750 re te Sales- Contribution per Unit $(180,000 + 4750) & 8.25 $ 189750 - 23000 Vnits, $8.25

empat Selling price 3 per veit Variable Cost : $21-3) 18 u v. 12 pero Unit fixed Cost - ($180,000 + 72000) = $ 252070 Contribution Margin patio = SXICO = 12 xlos 30 = 40 % BEP in sales Units = te Continbution per vnet = $2520no $ 12 – 21000 Units Sales dollars Fe BEP in c/M satio $252000, 407. $630,000

2 Comparetive Contribution Margin Income he Statement Stal I Automated / Non-automated 26000 Uits 220m Unit 2 total per unit a total per ane? 80000 30.00 100y 80000 30.00 sales. 07 780,000 30.00 100%. 546000 21.00 70%. 468000 18.00 - variable expenses Contribution 234000 9.00 207, 312000 12.00 (-) Fixed expense 180,000 - 23 y 252000 mm 32.31% Wet operating 54000 77. 60,000 7.691 I recommend ito autornate the operations, of the company. It will increase profit margin 0.69%.