Question

Problem 6-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure (LO6-1, LO6-3, LO6-4, LO6-5, LO6-6] 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: 7.3 points Sales (12,700 units X $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 381,000 228,600 152,400 170,400 $ (18,000) eBook References 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 $6,700 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 $40,000 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 $0.80 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400? 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 20,000 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)?

Answer 1

unc F unil's Sales 381,000 30 12700 18 228600 12700 Vasiable Crfpenses Contri bution (2 152400 170,400 Fexed apenses lon opeiating CI6000 Net unit Contribubon CM ratio Salest unit per Paice7 12 40 % 30 Break Total fxed cast even point unit Contrebulion 14200 umls 170 400 12

Selling price BEP in unts x BEP in Dalars 426000 $ 14200 x 3o (OR) Fixad cot 170400 4.26000 $ CM Tatio 407 2) Increase in Sales 81,000 C G 700) hen: Incaease in Cot 823004 net opeiatangincome = Tncecase in Revised selling pice 3) r0% 4 30 27 $ Зо 1 40 p00 dvetteing Lacacase expeclid in sales 12700 unil coot Incicase in 12700 x 3 12700 x 27- Incraase in sales 304800 income hopeiating 17 Nel increase 2,64 ,200 40000 304800 17 epeuating = Crg000) in come Revised net 264800 246 800 Variable cost per ut o.g Tncsease in Revised Vasiable cost per unit $ 881 4400t 1800o Reguired in creax in unit ¢ 11.2 pen contribution Levised 22400 2 000 unls No-uinte rcquired 11.2 BUSIENT

Reduction in vasiabe fx penses unit Incsease in fxed $52000 eapense Rewised CM ratio (2+3 30 50 %% Revised Bep in unies 170400 + 52000 15 14826 67 or 14827 unila Ravised BEP in dellas 170400+52000 50% 444 800 11

Success E DATE PCenoideing 569 Stalemene Optien Income autoniaion Total Particulass Per unil Sales C2o000 umel) 00000 30 100 Vauable cool 15 300000 50 Contoi bulion 300000 15 50 Fixed co Net income Rlon) 222400 77600 Oplion T1 Sales automation no Caeeoo unib) 30 600000 100 Variable cot 360000 13 60 Cont ributron 12 240000 40 Fined cool Net iniome o4s 70400 69600

5 (c) Automation of operations is recommended because it results in higher contribution and net profits for the same activity level (number of units sold = 20000)