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 (12,800 units * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 256,000 128.000 128,000 143, eee $ (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 $6,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $85,000 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 $38,000 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 $4.900? 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 20,000 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 20.000)?

Answer 1

1. 	Units		12800
   	Selling Price		20
   	Particulars	Per Unit	Amount ($)
   A)	Sales	20	256000
   B)	Variable Expenses	10	128000
   C)	Contribution	10	128000
   D)	Fixed Expenses		143000
   E)	Profit/(loss)		-15000
   F)	C M Ratio (C/ A*100)		50
   G)	Break Eeven Point In Sales $ (D/F)		286000
   H)`	Break Eeven Point In Sales unit (G/SP)		14300

   Here SP = Selling Price Per Unit

2. Revised operating Profit

   	Units(A/SP)		17050
   	Selling Price		20
   	Particulars	Per Unit	Amount ($)
   A)	Sales   (256000+85000)	20	341000
   B)	Variable Expenses + Advertisement Expensess ((341000/20*10)+6500)	10	177000
   C)	Contribution (A-B)	10	164000
   D)	Fixed Expenses		143000
   E)	Profit/(loss) (C-D)		21000

   *SP = Selling Price
3. when SP reduced by 10% and Advertisement Expenses increased by $38000 Operating Profit is

   	Units(12800*2)		25600
   	Selling Price (20-10%of 20)		18.00
   	Particulars	Per Unit	Amount ($)
   A)	Sales	20	460800
   B)	Variable Expenses + Advertisement Expensess ((25600*10)+38000)	10	294000
   C)	Contribution (A-B)	10	166800
   D)	Fixed Expenses		143000
   E)	Profit/(loss) (C-D)		23800

4. 	Particulars	Amount ($)
   A)	Profit/(loss) (Given)	4900
   B)	Fixed Expenses	143000
   C)	Contribution (A+B)	147900
   D)	Variable Cost per unit = 10+ 0.70	10.7
   E)	Selling Price per unit	20
   F)	Contribution Per Unit (E-D)	9.3
   G)	Units Required for Profit of $4900 (D/F)	15904 (round Off)
   	Contribution Per Unit = Selling Price per unit - variable Cost Per Unit

   a)
5. A) computation revised CM Ratio and Break Even Points in $ and units

   	Particulars	Per Unit $
   A)	Sales	20
   B)	Variable Expenses (10-3)	7
   C)	Contribution (A-B)	13
   D)	Fixed Expenses (143000+58000)	201000
   E)	C M Ratio (C/ A*100)	65
   F)	Break Eeven Point In Sales $ (D/E)	309231
   G)`	Break Eeven Point In Sales unit (F/SP)	15462

5 B)

	Units		20000
	Selling Price		20
		Automated			Not Automated
	Particulars	Per Unit	Amount $	%	Per Unit	Amount $	%
A)	Sales	20	400000	100	20	400000	100
B)	Variable Expenses (10-3)	7	140000	35	10	200000	50
C)	Contribution (A-B)	13	260000	65	10	200000	50
D)	Fixed Expenses (143000+58000)		201000	50.25		143000	35.75
E)	Profit/(loss) (C-D)		59000	14.75		57000	14.25

5 C) Yes It will be benificial for the company to opt for automation as the profit increased by $2000/-