Question

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 * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 396,000 198,000 198,000 220,500 $ (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 $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 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 $36,000 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 $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,300? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $54,000 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 20,700 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 20,700)? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req3 Reg 4 Req 5A Req 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 Reqi Req 2 >

Answer 1

Per unit sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 13200 Units 396000 198000 198000 220500 -22500 CM ratio, Break Even point in Units Dollars 50% 14700 441000 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 (89000*50%) Increase in Fixed cost Increase in Net income 89000 44500 6300 38200 Increase By $ 38,200

10% 36000 Reduction in Selling Price Increase in Advertisements Sales Will be Double PEM INC Contribution Margin Statement 712800 Variable Expenses 396000 Contribution Margin 316800 Fixed Expense 256500 Net Operating Loss 60300 sales Net Operating income 60300 New Package Increase the paking cost by Target Net income 0.40 4300 New Contribution Margin (15-0.40) Sales Units (220500+4300)/14.60 14.60 15397 Sales Units 15397

Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (15+3) New Fixed cost (220500+54000) 54000 18 274500 CM Ratio 60% Break-Even Point in Units = 15250 Break - Even Point in Dollars = 457500 Assume Company expeted to sell 20700 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % Total Per unit % sales 621000 30 100% 621000 30 Variable Expenses 310500 50% 2484001 12 Contribution Margin 310500 15 50% 372600 18 Fixed Expense 220500 274500 Net Operating Income 90000 98100 100% 40% 60% Would you Recommand for Automation YES