Question

Problem 5-22 CVP Applications; Contribution Margin Ratlo; Break-Even Analysis; Cost Structure (LO5-1, LO5-3, LO5-4, LO5-5, LO5-6) 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 * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 378,000 189,000 189,000 211,500 5 (22,500)

Answer 1

30 Per unit sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 1) CM ratio, Break Even point in Units Dollars 12600 Units 378000 189000 189000 211500 -22500 50% 14100 423000 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 (90000*50%) Increase in Fixed cost Increase in Net income 90000 45000 6400 38600 Increase By S 38,600

Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 32000 PEM INC Contribution Margin Statement sales 680400 Variable Expenses 378000 Contribution Margin 302400 Fixed Expense 243500 Net Operating Loss 58900 Net Operating Loss 58900 New Package Increase the paking cost by Target Net income 0.80 4700 New Contribution Margin (15-0.80) Sales Units (211500+4700)/14.20 14.20 15225.4 Sales Units 15225

Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (15+3) New Fixed cost (211500+56000) 56000 18 267500 CM Ratio (18/30) 60% Break-Even Point in Units (267500/18) 14861 Break - Even Point in Dollars 445833 Assume Company expeted to sell 21000 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % Total Per unit % sales 630000 30 100% 630000 30 Variable Expenses 315000 15 50% 252000 12 Contribution Margin 315000 15 50% 378000 18 Fixed Expense 211500 267500 Net Operating Income 103500 110500 100% 40% 60% Would you Recommand for Automation YES