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 (12,800 units × $30 per unit) $ 384,000 Variable expenses 230,400 Contribution margin 153,600 Fixed expenses 171,600 Net operating loss $ (18,000 )

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 $6,900 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $83,000 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 $38,000 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 $4,400?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $51,000 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

	contribution margin per unit=			153600/12800
				12
1)	CM ratio = contribution/sales
		153600/384,000
		40.00%
	BEP(units) = total fixed cost/contribution margin per unit
		171,600/12
		14300
	BEP(dollars) = 14300*30
		429000
	CM ratio			40%
	Break even point in units			14300
	Break even point in dollars			429000
2)	increase in contribution			(83000*40%)		33200
	less : increase in advertising budget					6,900
	increase in net income					26,300
	increases by		26,300
3)	units = 12800*2 =		25600 units ; selling price = 30*90%=$27
		Contribution Income statement
	Sales	(25600*27)			691200
	Variable expense		(25600*18)		460800
	Contribution margin				230400
	Fixed expenses		(171,600+38000)		209,600
	Net income				20,800
4)	New contribution margin = 12-.70
			11.3
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(171600+4400)/11.3
		15575.22
	Sales units		15,575
5)
	CM ratio = contribution/sales
		15/30
		50.00%
	BEP(units) = total fixed cost/contribution margin per unit
		(171600+51000)/15
		14840
	BEP(dollars) =		222600/50%
		445200
	CM ratio			50%
	Break even point in units			14840
	Break even point in dollars			445200
			20300
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		609000	30	100%	609000	30	100%
	Variable expenses		365400	18	60%	304500	15	50%
	Contribution margin		243600	12	40%	304500	15	50%
	Fixed expenses		171,600			222,600
	Net operating income		72,000			81,900
c)		yes