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 fin difficulty for some time. The company's contribution format income statement for the most recent month is given below: S 585,000 409,500 175,500 180,000 Sales (19,500 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ (4,500) Required 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. y advertising budget, combined with an intensified effort by the sales staff 2. The president believes that a $16,000 increase in the monthl 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? Refer to the onginal data The sales manager is con ned that a 10% reduction in the selling prce 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 sales. The new package would increase packagin g 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 $3 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 each alternative.) C Would you recommend that the company automate its operations (Assuming that the company expects to sell 26,000)? Complete this question by entering your answers in the tabs below. Req 4 Req SA Req 5B Req 5C Req 1 Req 2 Req 3 Compute the company's CM ratio and its break-even point in unit sales and dolar sales. (Do not round intermediate calculations.) CM ratio Break-even point in unit sales Break-even point in dollar sales

Answer 1

Original Data:

Selling Price per unit = $30.00

Variable Cost per unit = Variable Expenses / Number of units sold
Variable Cost per unit = $409,500 / 19,500
Variable Cost per unit = $21.00

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $30.00 - $21.00
Contribution Margin per unit = $9.00

Answer 1.

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $9.00 / $30.00
Contribution Margin Ratio = 30%

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $180,000 / $9.00
Breakeven Point in unit sales = 20,000

Breakeven Point in dollar sales = Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $180,000 / 0.30
Breakeven Point in dollar sales = $600,000

Answer 2.

Increase in Sales = $80,000
Increase in Fixed Expenses = $16,000

Increase in Net Operating Income = Increase in Sales * Contribution Margin Ratio - Increase in Fixed Expenses
Increase in Net Operating Income = $80,000 * 0.30 - $16,000
Increase in Net Operating Income = $8,000

Answer 3.

Selling Price per unit = $30.00 - 10% * $30.00
Selling Price per unit = $27.00

Fixed Expenses = $180,000 + $60,000
Fixed Expenses = $240,000

Number of units sold = 2 * 19,500
Number of units sold = 39,000

Net Operating Income (Loss) = Number of units sold * (Selling Price per unit - Variable Cost per unit) - Fixed Expenses
Net Operating Income (Loss) = 39,000 * ($27.00 - $21.00) - $240,000
Net Operating Income (Loss) = -$6,000

Answer 4.

Variable Cost per unit = $21.00 + $0.75
Variable Cost per unit = $21.75

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $30.00 - $21.75
Contribution Margin per unit = $8.25

Required Unit Sales = (Fixed Expenses + Target Profit) / Contribution Margin per unit
Required Unit Sales = ($180,000 + $9,750) / $8.25
Required Unit Sales = 23,000

Answer 5-a.

Variable Cost per unit = $21.00 - $3.00
Variable Cost per unit = $18.00

Fixed Expenses = $180,000 + $72,000
Fixed Expenses = $252,000

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $30.00 - $18.00
Contribution Margin per unit = $12.00

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $12.00 / $30.00
Contribution Margin Ratio = 40%

Breakeven Point in unit sales = Fixed Expenses / Contribution Margin per unit
Breakeven Point in unit sales = $252,000 / $12.00
Breakeven Point in unit sales = 21,000

Breakeven Point in dollar sales = Fixed Expenses / Contribution Margin Ratio
Breakeven Point in dollar sales = $252,000 / 0.40
Breakeven Point in dollar sales = $630,000

Answer 5-b.

Answer 5-c.

Yes, company should automate its operations