Question

Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (18,000 units at $25 per unit) Less: Variable expenses $450,000 270,000 Contribution margin Less: Fixed expenses 180,000 188,000 Net operating loss $ (8,000) Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. Contribution margin ratio Break-even point in units Break-even point in dollars 2. The sales manager feels that an $20,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $130,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

Answer 1

Memofax Inc.

1. Contribution margin ratio = Contribution / Sales

= 180,000/450,000 = 40%

BEP in units =Fixed cost/ Contribution per unit

= 188,000/(25×40%) = 18,800 units

BEP in dollars = BEP Units × Selling price

= 18,800 × 25 = $ 470,000

2. Income = (Sales × Contribution ratio) - Fixed cost

= (450,000+130,000) × 40% - (188,000+20,000) = $ 24,000

3. Income statement

Sales (18,000×2×(25×90%))	$ 810,000
Less: Variable cost (270,000×2)	($ 540,000)
Contribution	$ 270,000
Less: Fixed cost (188,000+85,000)	($ 273,000)
Net Operating loss	($ 3,000)

4. Variable cost per unit = Selling price × contribution margin

= $ 25 × 60% = $ 15

Units = (Fixed cost + Desired profit) / (selling price - variable cost)

= (188,000+2000) /(25-15-0.50) = 20,000 units

5. By Automation

a) Variable cost = $ 5 per unit

Fixed cost = $ 188,000 + $ 605,00 = $ 248,500

Contribution margin ratio = (25-5) /25 = 80%

BEP in Units = 248,500/20 = 12,425 units

BEP in dollars = 12,425 units × $ 25 = 301,625

b) Comprehensive income statement:

	Not Automated			Automated
	Total	per unit	Percentage	Total	per unit	Percentage
Sales	625,000	25	100%	625,000	25	100%
Less: Variable cost	(375,000)	15	60%	125,000	5	20%
Contribution	250,000	10	40%	500,000	20	80%
Less: Fixed cost	(188,000)			(248,500)
Profit	62,000			251,500