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 (12,900 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 258,000 154,800 103,200 115, 200 $ (12,000) 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 $6,700 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 $33,000 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 $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,800? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 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 20,400 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 20,400)?

Answer 1

1. Contribution margin ratio = contribution /sales

                                                   = 103200/258000 X100 = 40%

Break even point = 115200/0.40 = $288,000

Break even point in unis = 288000/20 = 14400 units

2. Revised operating statement

Sales (258000+88000)              = $346000

Variable cost (40%)                     = ($138400)

Contribution margin                    = $138400

Fixed cost (115200+6700)        = ($121900)

Net operating income                = $16500

Existing Operating Loss = $12000

Net Operating income increase (16500+12000) = 28500

3. Revised Operating income statement as per sale manager prediction

Revised sales price (20-10%) = 18 per unit

Revised cost (115200+33000) = $148200

Sales (25800X18)            = $464400

Contribution margin         = $325080 (464400X0.70)

Fixed cost                           = $148200

Net operating income     = $176880

Net operating income (176880+12000) = $188880 as per sales manager prediction

4. Calculation of desired sales unit if target profit is $4800

Existing variable cost per unit (154800/15480) = $10 per unit

Add: package cost                                                   = $0.50

Revised Variable cost per unit                               = $10.50

Revised contribution (20-10.50) = $9.50

Desired Sales = Fixed cost+desired profit/ contribution per unit

                            = (140000+4100)/9.50 = 15169 units

5. Revised variable cost (10-3) = 7 per unit

Revised fixed cost (115200+55000) = $170200

Revised contribution per unit(20-7) = $13 per unit

Contribution (13X10320) = $134160

a. CM ratio = 134160/258000 = 52%

BEP Sales in Unit = 170200/13 = 13092 units

BEP in Value (13092X20) = $261840

b. Operating income statement, if next sales is 20400 units (value in $)

                                                   if operation is not automated              If operation is automated

SP                                                          20                                                       20

VC                                                          10                                                       7

Contribution margin                           10                                                     13

Fixed cost                                       115200 170200

Contribution(20400units) 204000 265200

Operating income 88800 94800

(contribution-fixed cost)                                     

c. Comments: As we see if company is automating its system the operating income is increased too94800. we will recommend for automation.