Question

5B:

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 (19,500 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 585,000 409,500 175,500 180,000 $ (4,500) 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 $16,000 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 $60,000 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 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $9,750? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 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 26,000 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 26,000)?

Answer 1

Per unit 30 sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 19500 Units 585000 409500 175500 180000 -4500 1) CM ratio, Break Even point in Units Dollars 30% 20000 600000 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 Increase in Fixed cost Increase in Net income 80000 24000 16000 8000 Increase By $ 8,000

Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 60000 PEM INC Contribution Margin Statement sales 1053000 Variable Expenses 819000 Contribution Margin 234000 Fixed Expense 240000 Net Operating Loss -6000 New Pac 14) New Package Increase the paking cost by Target Net income 0.75 9750 New Contribution Margin (9-0.75) | Sales Units (180000+9750)/8.25 | Sales Units 23000 8.25 23000

72000 Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin New Fixed cost 12 252000 CM Ratio 40% Break-Even Point in Units 21000 Break - Even Point in Dollars 630000 Assume Company expeted to sell 26000 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % Total Per unit % sales 780000 30 100% 780000 Variable Expenses 5460001 21 70% 468000 18 Contribution Margin 234000 9 30% 312000 1 2 Fixed Expense 180000 252000 Net Operating Income 54000 60000 0000 30 100% 60%| 40% Would you Recommand for Automation YES