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 (12,600 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 5 252,000 151,200 100, see 112.800 (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 $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 $37,000 in the monthly advertising budget will double unit sales. If the sales manager is right, what will be the revised net operating Income (loss)? Next >

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first four questions should be answered. Kindly take note of it.

PART 1

	Total	Per Unit	Percent of Sales
Sales (12600 units)	$	252000	$	20	100	%
Variable expenses		151200		12	60	%
Contribution margin	$	100800	$	8	40	%

Variable expenses=(151200/12600)

Contribution margin Ratio= contribution margin per unit / sales price per unit = 8/20 = 40%

Unit sales to break even = fixed expenses / Unit contribution margin = 112800/8 = 14100 units

Dollar sales to break even = fixed expense / CM ratio = 112800/40% = $282000

PART 2

Incremental contribution margin:
$82,000 increased sales × 40% CM ratio	$	32800
Less increased advertising cost		6200
Increase in monthly net operating income	$	26600

Increases by $26600

PART 3

PEM Inc.

Contribution margin income statement

sales	453600 ((12600*2)*(20*(1-10%))
Variable expenses	302400 (12600*2)*12
Contribution margin	151200
Fixed expenses	149800 (112800+37000)
Net operating profit	$1400

PART 4

Unit sales to attain target profit = Target profit + Fixed expenses/CM per unit = (4700+112800)/(20-(12+0.80)) = 16319 units