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 (13,200 units × $30 per unit) $ 396,000 Variable expenses 237,600 Contribution margin 158,400 Fixed expenses 176,400 Net operating loss $ (18,000 ) 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $60,000 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 20,700 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 20,700)?

Answer 1

1)

	Total	Perunit
Sales (13,200 units × $30 per unit)	396,000	30	100%
Variable expenses	237,600	18	60%
Contribution margin	158,400	12	40%

	Total	Per unit
Sales (20,700 units × $30 per unit)	621,000	30	100%
Variable expenses (20,700 * (18 - 3)	310,500	15	50%
Contribution margin	310,500	15	50%

　

Break-even point in units = (Fixed expenses + 60,000) / Unit contribution margin = (176,400 60,000) / 15 = 15,760 units

(in sales) = (176,400 + 60,000) / 0.50 = $472,800

2)

	NOT AUTOMATED			AUTOMATED
Sales (20,700 units × $30 per unit)	621,000	30	100%	621,000	30	100%
Variable expenses (20,700 * $18 per unit)	372,600	18	60%	310,500	15	50%
Contribution margin	248,400	12	40%	310,500	15	50%
Less: Fixed expenses	176,400			236,400
Net operating income	72,000			74,100