Question

Problem 5-22 CVP Applications: Contribution Margin Ratio: Break-Even Analysis; Cost Structure [L05-1, 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 $ 30 per unit) Sales 13, 300 unita Variable expenses Contribution margin Fixed expenses Net operating loss $ 399,000 199,500 199,500 222.000 $ 22,500) 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 $6,200 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 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 $39,000 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 $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4.2007 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 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 20.400 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 20,400)? Complete this question by entering your answers in the tabs below. Reg1 Reg 1 Reg 2 Reg 2 Reg 3 Rea3 Rega Req 4 Rea SA Reg SA Req se Reg 5B Req 5C Compute the company's CM ratio and its break-even point in unit sales and dollar sales. (Do not round intermediate calculations, Round "CM ratio to the nearest whole percentage (i... 0.234 should be entered as '23"))

Thanks for the help, and thanks for your time!

Answer 1

1.CM Ratio = Contribution Margin/Sales

= 199,500/399,000

= 50%

Break even point in unit sales = Fixed costs/Contribution Margin per unit

= 222,000/15

= 14,800 units

Dollar sales = 222,000/50%

= $444,000

2.Increase in Net Operating Income = Increase in Contribution Margin – Increase in cost

= 88,000*50% - 6,200

= $37,800

3.Net operating Income = 26,600*(27-15) – 222,000-39,000

= $58,200

4.Target Profit = $4,200

Fixed costs = 222,000

Target Contribution Margin = $226,200

Units required to be sold = 226,200/(30-15-0.6)

= 15,708.33 units

5.CM Ratio = (30-12)/30 = 60%

Break even point in unit sales = (222,000+55,000)/18 = 15,388.89 units

Dollar sales = 277000/65%

= $461,666.67

b.

	Without Automation			With Automation
	Per unit	Total	%	Per unit	Total	%
Sales	30	612,000	100.00%	30	612,000	100.00%
Variable expenses	15	306,000	50.00%	12	244,800	40.00%
Contribution Margin	15	306000	50.00%	18	367200	60.00%
Fixed Expenses	10.8824	222,000	36.27%	8.41346	277,000	45.26%
Net operating income	4.11765	84,000	13.73%	2.58654	90,200	14.74%

Yes, should automate