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 (13,100 units X $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 262,000 131,000 131,000 146,000 $ (15,000) 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 $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $83,000 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 $34,000 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 $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,600? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $50,000 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 20,300 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 20,300)?

Answer 1

Per unit 20/ sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 13100 Units 262000 131000 131000 146000 -15000 10 1) CM ratio, Break Even point in Units Dollars CM Ratic 50% 14600 292000 Break-Even Point in Units Break - Even Point in Dollars Formulas CM Ratio = Contribtuion Margin / Sales BEP in Units = Fixed Cost / CM per unit BEP in Dollars = Fixed cost / CM ratio 2) Increase in sales Increase in Contribution Margin (83000*50%) Increase in Fixed cost Increase in Net income 83000 41500 6800 34700 Increase By $ 34,700

Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 34000 PEM INC Contribution Margin Statement sales 471600 Variable Expenses 262000 Contribution Margin 209600 Fixed Expense 180000 Net Operating Loss 29600 Net Operating income 29600 New Package Increase the paking cost by Target Net income 0.60 4600 New Contribution Margin (10-0.60) Sales Units (146000+4600)/9.30 9.40 16021.3 Sales Units 16021

58000 Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (10+3) New Fixed cost (146000+58000) 13 204000 CM Ratio (13/20) 65% Break-Even Point in Units (204000/13) 15692 Break - Even Point in Dollars 313846 Assume Company expeted to sell 20300 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % Total Per unit % sales 406000 20 100% 406000 20 Variable Expenses 203000 10 50% 142100 7 Contribution Margin 203000 10 50% 263900 13 Fixed Expense 146000 204000 Net Operating Income 57000 59900 100% 35% 65% Would you Recommand for Automation YES