Question

Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company’s contribution format income statement for the most recent month is given below:

  

Sales (12,500 units at $20 per unit)	$	250,000
Less: Variable expenses		150,000
Contribution margin		100,000
Less: Fixed expenses		106,000
Net operating loss	$	(6,000)

Required:

1.	Compute the company’s CM ratio and its break-even point in both units and dollars.

      

2.

The sales manager feels that an $10,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $80,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company’s monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

    

3.	Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $46,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

    

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 $0.5 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $6,500? (Do not round intermediate calculations.)

      

  

5.	Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $92,800 per month.

a.	Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round "Contribution Margin Ratio" to 2 decimal places.)

            

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. (Do not round intermediate calculations. Round "Per Unit" and "Percentage" to 2 decimal places.)

            

Answer 1

	contribution margin per unit=			100,000/12,500
				8
1)	CM ratio = contribution/sales
		100,000/250,000
		40.00%
	BEP(units) = total fixed cost/contribution margin per unit
		106000/8
		13250
	BEP(dollars) = 13250*20
		265000
	CM ratio			40%
	Break even point in units			13250
	Break even point in dollars			265000
2)	increase in contribution			(80,000*40%)		32000
	less : increase in advertising budget					10,000
	increase in net income					22,000
	increases by		22,000
3)	units = 12500*2 =		25000 units ; selling price = 20*90%=$18
		Contribution Income statement
	Sales	(25000*18)			450000
	Variable expense		(25000*12)		300000
	Contribution margin				150000
	Fixed expenses		(106000+46000)		152,000
	Net income				-2,000
4)	New contribution margin = 8-.5
			7.5
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(106000+6500)/7.5
		15000
	Sales units		15,000
5)
	CM ratio = contribution/sales
		14/20
		70.00%
	BEP(units) = total fixed cost/contribution margin per unit
		(106000+92800)/14
		14200
	BEP(dollars) =		198800/70%
		284000
	CM ratio			70%
	Break even point in units			14200
	Break even point in dollars			284000
			20000
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		400000	20	100%	400000	20	100%
	Variable expenses		240000	12	60%	120000	6	30%
	Contribution margin		160000	8	40%	280000	14	70%
	Fixed expenses		106,000			198,800
	Net operating income		54,000			81,200
c)		yes