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 (12,900 units X $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 258,000 154,800 103, 200 115,200 $ (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 $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 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 $30,000 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 $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,300? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $54,000 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 20,000 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 20,000)? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Req 4 Req 5A Req 5B Req 5C Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $30,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? (Losses should be entered as a negative value.) Revised net operating income (loss)

Answer 1

Req 1 :
Contribution margin per unit = Contribution margin / Units sold = 103200 / 12900	8
Contribution margin ratio = Contribution margin / Sales = 103200 / 258000	40%
Break-even point in units = Fixed expenses / Contribution margin per unit = 115200 / 8	14400
Break-even point in dollars = Fixed expenses / Contribution margin ratio = 115200 / 40%	288000

Req 2 :
Increase in Contribution margin ( Increase in sales * Contribution margin ratio = 89000 * 40% )	35600
(-) Increase in advertising budget	6800
Increase (decrease) in net operating income	28800
Increase in monthly net operating income	28800

Req 3 :
Revised selling price = Current selling price * ( 1 - % reduction ) = 20 * ( 1 - 10% )	18
Current unit variable cost = Variable expenses / Units sold = 154800 / 12900	12
Revised fixed costs = Current fixed costs + Increase in advertising expense = 115200 + 30000	145200
Revised sales units = Current sales units * 2 = 12900 * 2	25800

Sales ( 25800 * 18 )	464400
(-) Variable expenses ( 25800 * 12 )	309600
Contribution margin	154800
(-) Fixed expenses	145200
Net operating income (loss)	9600

Req 4 :
Revised unit variable cost = Current unit variable cost + 0.50 = 12 + 0.50	12.50
Units sales to attain target profit = ( Target profit + Fixed expenses ) / ( Selling price - Unit variable cost ) = ( 4300 + 115200 ) / ( 20 - 12.50 )	15933

Req 5A :
Revised unit variable cost = 12 - 3	9
Revised fixed expenses = 115200 + 54000	169200
Contribution margin per unit = Selling price - Unit variable cost = 20 - 9	11
CM ratio = Contribution margin per unit / Selling price = 11 / 20	55%
Break-even point in unit sales = Fixed costs / Contribution margin per unit = 169200 / 11	15382
Break even point in dollar sales = Fixed costs / CM ratio = 169200 / 55%	307636

Req 5B :
	Not automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	400000	20	100%	400000	20	100%
Variable expenses	240000	12	60%	180000	9	45%
Contribution margin	160000	8	40%	220000	11	55%
Fixed expenses	115200			169200
Net operating income	44800			50800

Req 5C :

Answer : Yes

Explanation : If the company sells 20000 units, then the company will earn more net operating income if it automates its operations.