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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 (13,300 units * $20 per unit) Variable expenses Contribution margin Pixed expenses Net operating loss 159,600 106,400 119.400 $ (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 $6,100 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 $39,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (oss)? 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 $0.80 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,100? 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 20.200 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 20,200)? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg3 Reg4 Reg SA Reg 5B Reg SC Compute the company's CM ratio and its break-even point in unit sales and dollar sales. (Do not round intermediate calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23").) СМ го %

Answer 1

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Answers are highlighted in yellow: Solution: 1)a Contribution margin ratio = Contribution margin / Sales (106400/266000) *100 = 40% 1) Break even point in units = Fixed cost / Contribution margin per unit (118400)/(106400/13300) 14800 units 1)C Break even point in dollar = Fixed cost / Contribution margin ratio (118400)/(40%) 296000 Incremental Contribution Margin (86000*40%) Less: Incremental Advertising cost Net Operating income will increase by" $ $ $ 34,400 -6,100 28,300 Particulars Sales (13300*2) * (20*90%) Less: Variable expense (26600)*(12) Contribution margin Less: Fixed cost (118400+39000) Net Operating income Amount 478800 319200 159600 157400 2,200 $

Particulars Total Fixed cost Add: Target Profit Total Contribution margin per unit (8 -0.80) Units Sales to attain the target profit Amount 118400 4100 122500 7.2 17014 5a Contribution margin ratio = Contribution margin / Sales CM Ratio = [(8+3)/20] *100 = 55% lor 0.55 Break even point in units = Fixed cost / Contribution margin per uni (118400+60000) / (11) 16218 units Break even point in dollar = Fixed cost / Contribution margin ratio (118400+60000) / (55%) 324364 5)b Particulars Sales (20400*30) Less: Variable cost @ 12 and @9 Contribution Margin Fixed Expense Net Income Not Automated Total Per unit Percentage 408000 20.00 100.00% 244800 12.00 60.00% 163200 8.00' 40.00% 118400 44,800 Total 408000 183600 224400 178400 46,000 Automated Per unit Percentage 20.00 100.00% 9.00 45.00% 11.00 55.00% $ $ 5) Yes Because, net income will increased by $ 1,200