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 (12,788 units * $38 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 381, ea 228.688 152,4ee 170,400 $ (18,eee) 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 $88,000 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 $39,000 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 $4,100? 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 20.800 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 20,800)? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Rea 2 Reg 3 Reg 3 Req 4 Reg 4 Req5A Req se Reg 5C Reg SC 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 |

Answer 1

PEM Inc. Requirement 1 The CM ratio is 40%. Sales (12,700 units) Variable expenses Contribution margin Total 381000 228600 152400 Percent Per unit of sales 30 100% 18 60% 40% Break even point in units = Fixed cost / Contribtuion per unit = 170400/12 = 14200 units Break even point in dollars = Fixed cost / Contribtuion margin % = 170200 / 40% = $426000 Requirement 2 Incremental contribution margin: $88,000 increased sales x 40% CM ratio Less: increased advertising cost Increase in monthly net operating income 35200 6500 28700 Since the company is now showing a loss of $18,000 per month, if the changes are adopted, the loss will turn into a profit of $10,700 each month ($28,700 less $18,000 = $10,700).

Requirement 3 Contribution Income Statement Sales 685800 Variable expenses 457200 Contribution margin 228600 Fixed Expenses 209400 Net Operating Income 19200 Sales: (25,400 units @ $27.00 per unit*) = $685,800 Variable expenses: (25,400 units @ $18 per unit) = $457,200 Fixed expenses: ($170,400 + $39,000) = $209,400 $30.00 - $30.00 x 0.10) = $27.00 Requirement 4 Profit = Unit CMQ-Fixed expenses $4,100 = ($30.00 - $18.40*) Q-$170,400 $4,100 = ($11.60) Q-$170,400 $11.600 = $174,500 Q = $174,500 = $11.60 Q = 15,043 units $18.00 + $0.40 = $18.40. Requirement 5 a. The new CM ratio would be: Percent Per unit of sales Sales 30 100% Variable expenses 15 50% Contribution margin 15 50% The new break-even point would be: Break even point in units = Fixed cost / Contribtuion per unit = 170400 + 50000 / 15 = 14693 units Break even point in dollars = Fixed cost / Contribtuion margin % = 170400 + 50000 / 0.50 = $440,800

5b. Contribution Income Statement Not Automated Total Per unit % Sales 624000 30 100% Variable expenses 374400 18 60% Contribution margin 249600 12 40% Fixed Expenses 170400 Net Operating Income 79200 Automated Total Per unit 624000 30 312000 15 312000 15 220400 91600 100% 50% 50% 5c. Yes Since there is increase in profit of 12400 ( 91600 - 79200), automation is recommended