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: points (8 03:40:59 Sales (12,900 units * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 258,000 154,800 103,200 115,200 $ (12,000) 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 $6,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $86,000 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 $40,000 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 $0.70 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 $58,000 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 20,900 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 20,900)? Answer is not complete. Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Reg 3 Reg 4 Req 5A Req 5B Req 5C Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $40,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? (Losses should be entered as a negative value.) Revised net operating income (loss) $2,600 < Req2 Req4 >

Answer 1

Per unit sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 20 12 8 12900 Units 258000 154800 103200 115200 - 12000 1) CM ratio, Break Even point in Units Dollars 40% 14400 288000 CM Ratio 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 (86000*0.40) Increase in Fixed cost Increase in Net income 86000 34400 6000 28400 Increase By 28,400

Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 40000 PEM INC Contribution Margin Statement sales 464400 Variable Expenses 309600 Contribution Margin 154800 Fixed Expense 155200 Net Operating Loss -400 Net Operating income -400 New Package Increase the paking cost by Target Net income 0.70 4600 New Contribution Margin 8-0.7 Sales Units (115200+4600)/7.3 7.30 16411 Sales Units 16411

Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (8+3) New Fixed cost (115200+58000) 58000 11 173200 CM Ratio (11/20) 55% Break-Even Point in Units (173200/11) 15745 Break - Even Point in Dollars 314909 Assume Company expeted to sell 20900 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % TotalP er unit % sales 418000 20 100% 418000 20 Variable Expenses 250800 60% 188100 Contribution Margin 167200 40% 229900 Fixed Expense 115200 173200 Net Operating Income 52000 56700 100% 45% 55% 11 Would you Recommand for Automation YES