Question

Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (15,000 units at $20 per unit) Less: Variable expenses $300,000 180,000 Contribution margin Less: Fixed expenses 120,000 130,000 Net operating loss $(10,000) Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. Contribution margin ratio Break-even point in units Break-even point in dollars 2. The sales manager feels that an $14,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $100,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

Answer 1

Req 1 :
Contribution margin per unit = Contribution margin / Units sold = 120000 / 15000	8
Contribution margin ratio = Contribution margin / Sales = 120000 / 300000	40%
Break-even point in units = Fixed expenses / Contribution margin per unit = 130000 / 8	16250
Break-even point in dollars = Fixed expenses / Contribution margin ratio = 130000 / 40%	325000

Req 2 :
Increase in Contribution margin ( Increase in sales * Contribution margin ratio = 100000 * 40% )	40000
(-) Increase in advertising budget	14000
Increase (decrease) in net operating income	26000
Increase in monthly net operating income	26000

Req 3 :
Revised selling price = Current selling price * ( 1 - % reduction ) = 20 * ( 1 - 10% )	18
Current unit variable cost = Variable expenses / Units sold = 180000 / 15000	12
Revised fixed costs = Current fixed costs + Increase in advertising expense = 130000 + 65000	195000
Revised sales units = Current sales units * 2 = 15000 * 2	30000

Sales ( 30000 * 18 )	540000
(-) Variable expenses ( 30000 * 12 )	360000
Contribution margin	180000
(-) Fixed expenses	195000
Net operating income (loss)	(150000

Req 4 :
Revised unit variable cost = Current unit variable cost + 0.5 = 12 + 0.5	12.5
Units sales to attain target profit = ( Target profit + Fixed expenses ) / ( Selling price - Unit variable cost ) = ( 8750 + 130000 ) / ( 20 - 12.5 )	18500

Req 5A :
Revised unit variable cost = 12 * 1/2	6
Revised fixed expenses = 130000 + 40800	170800
Contribution margin per unit = Selling price - Unit variable cost = 20 - 6	14
CM ratio = Contribution margin per unit / Selling price = 14 / 20	70%
Break-even point in unit sales = Fixed costs / Contribution margin per unit = 170800 / 14	12200
Break even point in dollar sales = Fixed costs / CM ratio = 170800 / 70%	244000

Req 5B :
	Not automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	400000	20	100%	400000	20	100%
Variable expenses	240000	12	60%	120000	6	30%
Contribution margin	160000	8	40%	280000	14	70%
Fixed expenses	130000			170800
Net operating income	30000			109200