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 (14,500 units at $24 per unit) Less: Variable expenses $348,000 261,000 Contribution margin Less: Fixed expenses 87,000 96,000 Net operating loss $ (9,000) 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 $13,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $95,000 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

Original Data:

Selling Price per unit = $24.00

Variable Cost per unit = Variable Expenses / Number of units sold
Variable Cost per unit = $261,000 / 14,500
Variable Cost per unit = $18.00

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $24.00 - $18.00
Contribution Margin per unit = $6.00

Answer 1.

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $6.00 / $24.00
Contribution Margin Ratio = 25%

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $96,000 / $6.00
Breakeven Point in unit sales = 16,000

Breakeven Point in dollar sales = Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $96,000 / 0.25
Breakeven Point in dollar sales = $348,000

Answer 2.

Increase in Sales = $95,000
Increase in Fixed Expenses = $13,000

Increase in Net Operating Income = Increase in Sales * Contribution Margin Ratio - Increase in Fixed Expenses
Increase in Net Operating Income = $95,000 * 0.25 - $13,000
Increase in Net Operating Income = $10,750

Answer 3.

Selling Price per unit = $24.00 - 10% * $24.00
Selling Price per unit = $21.60

Fixed Expenses = $96,000 + $25,000
Fixed Expenses = $121,000

Number of units sold = 2 * 14,500
Number of units sold = 29,000

Sales (29,000 * $21.60) Variable expense (29,000 * $18.00) Contribution margin Fixed expense Net operating income $ $ $ $ $ 626,400 522,000 104,400 121,000 -16,600

Answer 4.

Variable Cost per unit = $18.00 + $0.50
Variable Cost per unit = $18.50

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $24.00 - $18.50
Contribution Margin per unit = $5.50

Required Unit Sales = (Fixed Expenses + Target Profit) / Contribution Margin per unit
Required Unit Sales = ($96,000 + $3,000) / $5.50
Required Unit Sales = 18,000

Answer 5-a.

Variable Cost per unit = $18.00 - 50% * $18.00
Variable Cost per unit = $9.00

Fixed Expenses = $96,000 + $84,000
Fixed Expenses = $180,000

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $24.00 - $9.00
Contribution Margin per unit = $15.00

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $15.00 / $24.00
Contribution Margin Ratio = 62.50%

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $180,000 / $15.00
Breakeven Point in unit sales = 12,000

Breakeven Point in dollar sales = Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $180,000 / 0.6250
Breakeven Point in dollar sales = $288,000

Answer 5-b.

$ Contribution Income Statement Not Automated Total Per Unit 480,000 $ 24.00 100.00% 360,000 $ 18.00 75.00% 120,000 $ 6.00 25.00% 96,000 24,000 Sales Variable expense Contribution margin Fixed expense Net operating income S260 Automated Total Per Unit 487,200 $ 24.00 182,700 $ 9.00 304,500 $ 15.00 180,000 124,500 % 100.00% 37.50% 62.50% $ $ $ $ $ $ $ $