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 (12,800 units * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 256,000 153,600 102,400 114,400 $ (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 $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $84,000 per month. 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 $33,000 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 $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,700? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 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 20,300 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 20,300 units)?

Answer 1

Solution 1:
Contribution margin	102400
/Sales units	12800
Contribution margin per unit	8
/ Sales price per unit	20
Contribution Margin ratio	40%
Fixed costs	114400
/Contribution Margin per unit	8
break-even point in units	14300
Fixed costs	114400
/Contribution Margin ratio	40%
break-even point in dollars	286000
Solution 2:
Increase in sales	84000
*Contribution Margin ratio	40%
Increase in Contribution margin	33600
Less: Increase in advertising expense	6100
Net operating income Increase by =	27500
Solution 3:
Information:
New Sale Price (existing sales price*90%)	18
New sales units (existing units* 200%)	25600
New Fixed costs (Existing cost+ 33000)	147400
Variable cost per unit	12
PEM, Inc..
Contribution Income statement
Sales (New units *New Price)	460800
Less: variable costs	307200
Contribution margin	153600
Less: New Fixed costs	147400
Net Operating income	6200
Solution 4:
Fixed costs	114400
Add: Taget Profit	4700
Total Amount to be earned	119100
/New Contribution Margin per unit (Existing - $0.40)	7.60
Sales units to earn target income	15671
Solution 5-a:
Contribution margin (existing + $3)	11
/ Sales price per unit	20
New Contribution Margin ratio	55%
New Fixed costs (Existing + Increase)	170400
/Contribution Margin per unit	11
break-even point in units	15491
Fixed costs	170400
/Contribution Margin ratio	55%
break-even point in dollars	309818

Solution 5-b:
PEM, Inc.
Contribution income statement
	Not automated	Automated
	Total	Per unit	%	Total	Per unit	%
Units	20300			20300
Sales	406000	20		406000	20
Variable costs	243600	12		182700	9
Contribution margin	162400	8		223300	11
Fixed costs	114400			170400
Net operating income	48000			52900

Solution 5-c:
Should the company automate its operations?	Yes
(Because Net operating income increased)