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

CM Ratio (Contribution Margin Ratio)

CM Ratio (Contribution Margin Ratio) = (Contribution Margin Ratio / Sales) x 100

= ($175,500 / $585,000) x 100

= 30.00%

Break-Even Point in Unit Sales

Break-Even Point in Unit Sales = Total Fixed Expenses / Contribution per unit

= $180,000 / ($175,000 / 19,500 Units)

= $180,000 / $9 per unit

= 20,000 Units

Break-Even Point in Dollar Sales

Break-Even Point in Dollar Sales = Total Fixed Expenses / CM Ratio

= $180,000 / 0.30

= $600,000