Question

Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure (LO5-1, LO5-3, LO5-4, LO5-5, LO5-6) 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 $7,000 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 $30,000 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 $56,000 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 20,600 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.)

Answer 1

Per unit sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 12900 Units 258000 154800 103200 115200 -12000 1) CM ratio, Break Even point in Units Dollars 40% 14400 288000 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 (83000*40%) Increase in Fixed cost Increase in Net income 83000 33200 7000 26200 Increase By $ 26,200

Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 30000 3) PEM INC Contribution Margin Statement sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 464400 309600 154800 145200 9600 Net Operating income 9600 New Package Increase the paking cost by Target Net income 0.70 4400 New Contribution Margin (8-0.70) Sales Units (115200+4400)/7.30 7.30 16383.6 Sales Units 16384

56000 Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (8+3) New Fixed cost (115200+56000) 11 171200 CM Ratio (11/20) 55% Break-Even Point in Units (171200/11) 15564 Break - Even Point in Dollars 311273 Assume Company expeted to sell 20600 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit % Total Per unit % sales 412000 20 100% 412000 20 Variable Expenses 247200 12 60% 185400 Contribution Margin 164800 40% 226600 11 Fixed Expense 115200 171200 Net Operating Income 49600 55400 100% 459 55% Would you Recommand for Automation YES