Question

. AT&T 10:52 AM X 57% 0 ACC 2020. project.w.20.docx ... ACC 2020.project.w.20.docx Copius Copy, Inc. produces cartridge toner for copy machines. Sales have been very erratic, with some months showing a profit, and some months showing a loss. The company's contribution margin format income statement for the most recent month is given below: Sales (13,600 units at $20 per unit) Variable costs Contribution Margin Fixed costs Net operating loss $272,000 190.000 82.000 88.000 $ 6,000) Required: 1. Compute the company's CM ratio and its break-even point in both units and sales dollars. 2. The sales manager feels that an $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is correct, what will be the effect on the company's net operating income or loss? 3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. Prepare a new contribution margin format income statement, assuming that these changes are implemented. 4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by S.50 per unit. Assuming no other changes, how many units would need to be sold each month to earn a profit of $4,000? 5. Refer to the original data. By automating its production

Answer 1

1. CM Ratio: 13.97/20= 69.85%

[Variable cost per unit:- 190,000/13600 units= $13.97/ per unit]

BEP( in dollars):- 88000/69.85% = $ 125,984

BEP(In units):- 88000/(20-13.97) = 14593.69 (rounded off to 14594 units)

2. With increase in revenue by $70,000 at a cost of incurring $8,000 there would be increase in contribution margin which is as follows:

No. of units so increased: 70,000/ $20= 3500 units

Increase in contribution: 3500x $ 6.03 = 21,105

New Contribution: 82,000+ 21,105 = $103,105

New Fixed cost: 88,000+ 8,000 = $ 96,000

Net Profit: $ 7,105

3.

New Contribution Margin After Changes

Sales(27,200 units @ $ 18 per unit)	$ 489,600
Variable Cost (27,200x $13.97)	$ 379,984
Contribution Margin	$ 109,616
Fixed Cost (88,000+34,000)	$ 122,000
Net Loss	$ (12,384)

4. New variable cost: 13.97 + 0.50 = $ 14.47

Required contribution= $ 88,000 + $ 4,000 = $92,000

Min. Units to be sold: 92,000/(20-14.47) = 16,636.53 (rounded off to 16,637 units)

5.

(a) New CM Ratio: 6.985/20= 34.925%

[ New Variable cost per unit:- $13.97 /2= $6.985 per unit]

BEP( in dollars):- ($88,000+ $ 115,000)/34.925% = $591,406 (rounded off)

BEP(In units):- ($88,000+ $ 115,000)/(20-6.895) = 15490 units (rounded off)

(b)

If operations are not Automated

Sales(20,000 units @ $ 20 per unit)	$ 400,000
Variable Cost (20,000x $13.97)	$ 279,400
Contribution Margin	$ 120,600
Fixed Cost	$ 88,000
Net Profit	$ 38,600

If operations are Automated

Sales(20,000 units @ $ 20 per unit)	$ 400,000
Variable Cost (20,000x $6.985)	$ 139,700
Contribution Margin	$ 260,300
Fixed Cost (88,000+115,000)	$ 203,000
Net Profit	$ 57300

As there is increase of $18,700 on automation & the "net profit" at the level of 20,000 units is higher when the process is automated, it is advisable and recommended for the company to automate the production process.