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 (16,500 units at $40 per unit) Less: Variable expenses $660,000 495,000 Contribution margin Less: Fixed expenses 165,000 170,000 $(5,000) Net operating loss 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 $17,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $115,000 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

Memofax Inc. Requirement 1 Contribution Margin Ratio = Contribution Margin / Sales = 165000/ 660000 = 25% Breakeven point in units = Fixed Cost / Contribution per unit = 170000 / (165000/16500) = 170000 / 10 = 17000 units Breakeven point in dollars = Fixed Cost / Contribution margin percenatge = 170000 / 25% = $680000 Requirement 2 Incremental Contribution = $115000 x 25% = 28750 Incremental Net Income = 28750 - 17000 increase in fixed cost = 11750 Incease in Net Income = 11750 - (5000) = 6750 Requirement 3 Sales Variable expenses Contribution Margin Fixed Expenses Net Operating loss 1188000 36 x 16500 x 2 990000 30 x 16500 x 2 198000 206000 170000+36000 -8000 Requirement 4 Target Sales units = Fixed cost +Target Profit/ new Contribution per unit = (170000 + 5750)/( 40 - 30 -0.50) = 175750 / 9.5 = 18500 units Requirement 5a. New Contribution margin ratio = ( 40-15) / 40 = 62.5% Breakeven point in units = Fixed Cost / Contribution per unit = (170000 + 80000) /25 = 10000 units Breakeven point in dollars = Fixed Cost / Contribution margin percenatge = (170000 + 80000) /62.5% = $400000

Requirement 5b. Sales Variable expenses Contribution Margin Fixed Expenses Net Operating loss Not Automated Total Per unit % 1000000 40 100.00% 750000 30 75.00% 250000 10 25.00% 170000 80000 Automated Total Per unit % 1000000 40 100.00% 375000 15 37.50% 625000 25 62.50% 250000 375000