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 (13,000 units X $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 390,000 234,000 156,000 174,000 $ (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 $7,000 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? B. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of 34,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating ncome (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 $0.80 per unit. Assuming no other changes, how many units would have co 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 $52,000 each month. a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. . 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.) - Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,000)?

Answer 1

1. CM ratio = contribution margin/sales

= 156000/390000

= 40%

Break even point in units = fixed costs/contribution margin per unit

= 174000/12

= 14500 units

In sales dollars = fixed costs/contribution margin ratio

= 174000/40%

=$435,000

2.increase in operating income = increase in contribution margin- increase in fixed costs

= 83000*40% - 7000

=$26,200

3.revised net operating income = (27-18)*26000 -174000-34000

=$26000

4. Contribution margin per unit = 30-18-0.80 =$11.20

Number of units required to be sold =(4400+174000)/11.20

= 15928.57 units

5.CM Ratio = (30-15)/30 = 50%

Break even in units = (174000+52000)/15 = 15066.67 units

Dollar sales = 226000/50% =$452000

Contribution margin income statement

Not automated

	Per unit	Total	%
Sales	30	600,000	100
Variable expenses	18	360,000	60
Contribution margin	12	240,000	40
Fixed expenses	8.7	174,000	29
Operating income	3.3	66000	11

After automation

	Per unit	Total	%
Sales	30	600,000	100
Variable expenses	15	300,000	50
Contribution margin	15	300,000	50
Fixed expenses	11.3	226000	37.67
Operating income	3.7	74000	12.33

Yes, should automate