Question

need help with number 5

Due to erratic sales of its sole product a high-capacity battery for laptop computersPEM, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below. S585.000 Sales (19,500 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 409,500 175,500 180,000 $ (4,500) 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 $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales stall, will result in an $80,000 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 $60,000 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 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $9,750? 5. Refer to the original data. By automating, the company could reduce variable expenses by S3 per unit. However, fixed expenses would increase by $72,000 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 26,000 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 26,000)?

Answer 1

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PEM Inc.
Calculation of Variable expense per unit	Amount $	Note
Variable expenses	409,500.00	A
Units sold	19,500.00	B
Variable expense per unit	21.00	C=A/B
Answer 1	Amount $
Sales	585,000.00	D
Contribution margin	175,500.00	E
CM ratio	30.00%	F=E/D
Units sold	19,500.00	See B
Contribution margin per unit	9.00	G=E/B
Fixed expense	180,000.00	H
Break even units	20,000.00	I=H/G
Sell price	30.00	J
Break even $	600,000.00	K=I*J
Answer 2
Increase in sales	80,000.00	L
CM ratio	30.00%	See F
Increase in Contribution margin	24,000.00	M=L*F
Less: Advertising expense	16,000.00
Increase in net operating income	8,000.00
Answer 3
Current Sell price	30.00	See J
Reduction by 10%	3.00	N=J*10%
Revised Sell price	27.00	O=J-N
Current Sales units	19,500.00	See B
Increase by 100%	19,500.00	P=B*100%
Revised Sales units	39,000.00	Q=B+P
Income statement	Amount $
Sell Price	27.00	See O
Less: Variable expenses	21.00	See C
Contribution per unit	6.00	R
Units sold	39,000.00	See Q
Contribution margin	234,000.00	S=R*Q
Less: Fixed expense	180,000.00
Less: Advertising expense	60,000.00
Operating Loss	(6,000.00)
Answer 4
Current Contribution per unit	9.00
Less: packaging costs	0.75
Revised Contribution per unit	8.25	T
Target Profit	9,750.00
Add: Fixed expense	180,000.00
Target Contribution	189,750.00	U
Revised Contribution per unit	8.25	See T
Units to be sold	23,000.00	V=U/T
Workings for Answer 5
Current Variable cost per unit	21.00
Reduction by	3.00
Revised Variable cost per unit	18.00	W
Current Fixed costs	180,000.00
Increase by	72,000.00
Revised Fixed costs	252,000.00	X
Answer 5 a	Amount $	Note
Sell price	30.00	See J
Less: Variable expenses	18.00	See W
Contribution margin per unit	12.00	Y
CM ratio	40.00%	Z=Y/J
Fixed expense	252,000.00	See X
Break even units	21,000.00	AA=X/Y
Break even $	630,000.00	AB=AA*J

Answer 5 b	Not Automated	Automated	Note
Sell Price	30.00	30.00	See J
Less: Variable expenses	21.00	18.00	See C, W
Contribution per unit	9.00	12.00	AC
Units sold	26,000.00	26,000.00	AD
Contribution margin	234,000.00	312,000.00	AE=AC*AD
Less: Fixed expense	180,000.00	252,000.00	See H, X
Operating Income	54,000.00	60,000.00
Increase in Operating Income by		6,000.00

Answer 5 c

If automation is done then operating income will increase by $ 6,000 so yes the company should automate its operations.