Question

Sales (13,200 units × $30 per unit) $ 396,000

Variable expenses 198,000

Contribution margin 198,000

Fixed expenses 220,500

Net operating loss $ (22,500 )

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 $6,700 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 $33,000 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 $4,900?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $50,000 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)?

Answer 1

Req 1 :
Contribution margin per unit = Contribution margin / Units sold = 198000 / 13200	15
CM ratio = Contribution margin / Sales = 198000 / 396000	50%
Break-even point in units = Fixed expenses / Contribution margin per unit = 220500 / 15	14700
Break-even point in dollars = Fixed expenses / Contribution margin ratio = 220500 / 50%	441000

Req 2 :
Increase in Contribution margin ( Increase in sales * Contribution margin ratio = 86000 * 50% )	43000
(-) Increase in advertising budget	6700
Increase (decrease) in net operating income	36300
Increase in monthly net operating income	36300

Req 3 :
Revised selling price = Current selling price * ( 1 - % reduction ) = 30 * ( 1 - 10% )	27
Current unit variable cost = Variable expenses / Units sold = 198000 / 13200	15
Revised fixed costs = Current fixed costs + Increase in advertising expense = 220500 + 33000	253500
Revised sales units = Current sales units * 2 = 13200 * 2	26400

Sales ( 26400 * 27 )	712800
(-) Variable expenses ( 26400 * 15 )	396000
Contribution margin	316800
(-) Fixed expenses	253500
Net operating income (loss)	63300

Req 4 :
Revised unit variable cost = Current unit variable cost + 0.50 = 15 + 0.50	15.50
Units sales to attain target profit = ( Target profit + Fixed expenses ) / ( Selling price - Unit variable cost ) = ( 4900 + 220500 ) / ( 30 - 15.50 )	15545

Req 5A :
Current unit variable cost = Variable expenses / Units sold = 198000 / 13200	15
Revised unit variable cost = 15 - 3	12
Revised fixed expenses = 220500 + 50000	270500
Contribution margin per unit = Selling price - Unit variable cost = 30 - 12	18
CM ratio = Contribution margin per unit / Selling price = 18 / 30	60%
Break-even point in unit sales = Fixed costs / Contribution margin per unit = 270500 / 18	15028
Break even point in dollar sales = Fixed costs / CM ratio = 270500 / 60%	450833

Req 5B :
	Not automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	618000	30	100%	618000	30	100%
Variable expenses	309000	15	50%	247200	12	40%
Contribution margin	309000	15	50%	370800	18	60%
Fixed expenses	220500			270500
Net operating income	88500			100300

Req 5C :

Answer : Yes

Explanation : If the company sells 20600 units, then the company will earn more net operating income if it automates its operations.