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 (12,600 units * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 252,000 151,200 100,800 112,800 $ (12,000) 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 $80,000 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 $0.60 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 $51,000 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 20.900 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 20.900)? Complete this question by entering your answers in the tabs below.

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.							PEM
							Battery
Requirement 1							Laptop
Selling Price per unit		$                20
Less: Variable Cost per unit	$151,200/12,600	$               -12
Contribution Margin per unit		$                   8
Contribution Margin Ratio	$8/$20	40.00%
BEP in Units	$112,800/$8	14,100
BEP in Sales Dollars	$112,800/40%	$      282,000
Requirement 2
Incremental Contribution	$80,000 Sale*40% CM Ratio	$        32,000
Less: Incremental Advertising Cost		$         -6,500
Increase in Monthly Net Income		$        25,500
Requirement 3
New Sales Volume	12,600*2	25,200
New Selling Price	$20-10%	$                18
Sales	25,200 Units*$18	$      453,600
Less: Variable Cost	25,200 Units*$12	$    -302,400
Contribution Margin		$      151,200
Less: Fixed Cost	$112,800+$33,000	$    -145,800
Net Income		$          5,400
Existing Loss		$      -12,000
Increase in Income by		$        17,400
Requirement 4
Selling Price per unit		$                20
New Variable Cost per Unit	$12+$0.60	$         -12.60
Contribution Margin	A	$             7.40
Fixed Expense	B	$      112,800
Target Profit	C	$          4,300
No of Units to be Sold	(B+C)/A	15,824
Requirement 5A
Selling Price per unit		$                20
New Variable Cost per Unit	$12-$3	$           -9.00
Contribution Margin	A	$          11.00
Fixed Expense ($112,800+$51,000)	B	$      163,800
CM Ratio	$11/$20	55.00%
BEP in Units	$163,800/$11	14,891
BEP in Sales Dollars	$163,800/55%	$      297,818
Requirement 5B
		Not Automated				Automated
		Total	Per unit	%		Total	Per unit	%
Sales	20,900*$20	$      418,000	$                20	100%		$     418,000	$          20	100%
Less: Variable Expense	20,900*$12 & 9	$    -250,800	$               -12	-60%		$   -188,100	$           -9	-45%
Contribution Margin		$      167,200	$                   8	40%		$     229,900	$          11	55%
Less: Fixed Expense		$    -112,800				$   -163,800
Net Income		$        54,400				$       66,100
Requirement 5C
Yes as Net income is more in this case