Question

Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5-1, LO5-3, LO5-4, LO5-5, LO5-6] 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 * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $264,000 132,000 132,000 147,000 $(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 $84.000 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 $37.000 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 $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4.500? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55.000 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 20.600 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 20.600)? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5A Reg 5B Req 5C 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").) CM ratio Break-even point in unit sales Break-even point in dollar sales < Req1 Reg 2 >

Answer 1

Per unit 20 sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 13200 Units 264000 132000 132000 147000 -15000 1) CM ratio, Break Even point in Units Dollars 50% 14700 294000 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 (84000*50%) Increase in Fixed cost Increase in Net income 84000 42000 6800 35200 Increase By $ 35,200

Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 37000 3) PEM INC Contribution Margin Statement sales 475200 Variable Expenses 264000 Contribution Margin 211200 Fixed Expense 184000 Net Operating 27200 Net Operating income 27200 New Package Increase the paking cost by Target Net income 0.50 4500 New Contribution Margin (10-0.50) Sales Units (147000+4500)/9.50 9.50 15947.4 Sales Units 15947

55000 Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (10+3) New Fixed cost (147000+55000) 13 202000 CM Ratio (13/20) 65% Break-Even Point in Units (202000/13) 15538 Break - Even Point in Dollars 310769 Assume Company expeted to sell 20600 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % Total Per unit % 412000 20 100% 412000 20 Variable Expenses 206000 50% 144200 7 Contribution Margin 206000 10 50% 267800 Fixed Expense 147000 202000 Net Operating Income 59000 65800 sales 10/ 35% Would you Recommand for Automation YES