Question

QUESTIONS 5A 5B 5C ONLY

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 X. $399,000 $30 per unit) Variable expenses 239,400 Contribution margin 159,600 Fixed expenses 177,600 Net operating loss $ (18,000) 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 $83,000 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 $31,000 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 $4,400? 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 20,400 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 20,400)? csuming no et of $4,400? duce variable

ONLY QUESTION 5 PLEASE

Answer 1

Req 5A :
Current unit variable cost = Variable expenses / Units sold = 239400 / 13300	18
Revised unit variable cost = 18 - 3	15
Revised fixed expenses = 177600 + 50000	227600
Contribution margin per unit = Selling price - Unit variable cost = 30 - 15	15
CM ratio = Contribution margin per unit / Selling price = 15 / 30	50%
Break-even point in unit sales = Fixed costs / Contribution margin per unit = 177600 / 15	11840
Break even point in dollar sales = Fixed costs / CM ratio = 177600 / 50%	355200

Req 5B :
	Not automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	612000	30	100%	612000	30	100%
Variable expenses	367200	18	60%	306000	15	50%
Contribution margin	244800	12	40%	306000	15	50%
Fixed expenses	177600			227600
Net operating income	67200			78400

Req 5C :

Answer : Yes

Explanation : If the company sells 20400 units, then the company will earn more net operating income if it automates its operations.