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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 (13,000 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 390,000 195,000 195,000 217.500 $ (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 $81,000 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 $32,000 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 $52,000 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 20,600 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 20,600)? Complete this question by entering your answers in the tabs below. < Prev 3 of 3 Next >

Answer 1

Req 1 :
Contribution margin per unit = Contribution margin / Units sold = 195000 / 13000	15
Contribution margin ratio = Contribution margin / Sales = 195000 / 390000	50%
Break-even point in units = Fixed expenses / Contribution margin per unit = 217500 / 15	14500
Break-even point in dollars = Fixed expenses / Contribution margin ratio = 217500 / 50%	435000

Req 2 :
Increase in Contribution margin ( Increase in sales * Contribution margin ratio = 81000 * 50% )	40500
(-) Increase in advertising budget	6200
Increase (decrease) in net operating income	34300

Increase in monthly net operating income

34300

Req 3 :
Revised selling price = Current selling price * ( 1 - % reduction ) = 30 * ( 1 - 10% )	27
Current unit variable cost = Variable expenses / Units sold = 195000 / 13000	15
Revised fixed costs = Current fixed costs + Increase in advertising expense = 217500 + 32000	249500
Revised sales units = Current sales units * 2 = 13000 * 2	26000

Sales ( 26000 * 27 )	702000
(-) Variable expenses ( 26000 * 15 )	390000
Contribution margin	312000
(-) Fixed expenses	249500
Net operating income (loss)	62500

Req 4 :
Revised unit variable cost = Current unit variable cost + 0.50 = 15 + 0.50	15.50
Units sales to attain target profit = ( Target profit + Fixed expenses ) / ( Selling price - Unit variable cost ) = ( 4300 + 217500 ) / ( 30 - 15.50 )	15297

Req 5A :
Current unit variable cost = Variable expenses / Units sold = 195000 / 13000	15
Revised unit variable cost = 15 - 3	12
Revised fixed expenses = 217500 + 52000	269500
Contribution margin per unit = Selling price - Unit variable cost = 30 - 12	18
CM ratio = Contribution margin per unit / Selling price = 18 / 30	60%
Break-even point in unit sales = Fixed costs / Contribution margin per unit = 269500 / 18	14972
Break even point in dollar sales = Fixed costs / CM ratio = 269500 / 60%	449167

Req 5B :
	Not automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	618000	30	100%	618000	30	100%
Variable expenses	309000	15	50%	247200	12	40%
Contribution margin	309000	15	50%	370800	18	60%
Fixed expenses	217500			269500
Net operating income	91500			101300

Req 5C :

Answer : Yes

Explanation : If the company sells 20600 units, then the company will earn more net operating income if it automates its operations.