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: $ 399,000 239,400 159,600 177,600 Sales (13,300 units x $30 per unit) Variable expenses Contribution margin Fixed expenses $ (18,000) Net operating loss 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 $6,200 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $82,000 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 $31,000 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 $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,900? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $52,000 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 20,300 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 20,300)?

Answer 1

	Particulars	Per unit	No. of units	Total
		$		$
	Sales	30	13,300	399,000
	Variable Expenses	18	13,300	239,400
	Contribution Margin (CM)	12		159,600
	Fixed expenses			177,600
	Net Operating Loss			18,000
1	CM Ratio = (CM / S) x 100	40%
	BEP in unit sales = (F / CM per unit)	14800 units
	BEP in dollar sales = (F / CM Ratio)	444000 $
2	Sales			481,000
	Fixed expenses			183,800
	Net Operating Profit = (S x CM Ratio - F)			8,600
3	Particulars	Per unit	No. of units	Total
		$		$
	Sales	27	26,600	718,200
	Variable Expenses	18	26,600	478,800
	Contribution Margin (CM)	9		239,400
	Fixed expenses			208,600
	Net Operating Profit			30,800
4	Particulars	Per unit	No. of units	Total
		$		$
	Sales	30.0
	Variable Expenses	18.5
	Contribution Margin (CM)	11.5
	Fixed expenses			177600
	Unit sales to attain a target profit of $4,900		15870
	[(F + Target Profit) / CM per unit]
		Automated Operations			Not Automated Operations
5	Particulars	Per unit	No. of units	Total	Per unit	No. of units	Total
		$		$	$		$
	Sales	30	20,300	609,000	30	20,300	609,000
	Variable Expenses	15	20,300	304,500	18	20,300	365,400
	Contribution Margin (CM)	15		304,500	12		243,600
	Fixed expenses			229,600			229,600
	Net Operating Profit			74,900			14,000
	CM Ratio = (CM / S) x 100	50%			40%
	BEP in unit sales = (F / CM per unit)	15307 units			19133 units
	BEP in dollar sales = (F / CM Ratio)	459200 $			573990 $
	Yes, I would recommend automation