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 (13,200 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 396,000 198,000 198,000 229,500 $ (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 increase unit sales and the total sales by $85,000 per month. If the president is right, what will be the increase (decrease) in 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 $0,60 per unit. Assuming no other changes, how many units would have 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $50,000 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 20.800 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 20,800 units)? Comnia LI-

Answer 1

1 Contribution margin % Break even point in units Break even point in sale dollar 50% 14,700 $441,000 Selling price Variable cost Contribution margin per unit Contribution margin% (Contribution/Sales)*100 $30 $15| $15 50% Units Break even point in units Fixed cost Contribution margin per unit $220,500 $15 14,700 Sales $ Break even point in sale dollar Fixed cost Contribution margin % $220,500 50% $441,000 2 Increase in monthly income $36,300 Sales Variable expenses Contribution margin Fixed expenses Net operating income $481,000 $85,000 increase $240,500 50% of sales $240,500 $226,700 (220,500+ 6,200) $13,800 Existing net income (loss) Increase in monthly income -$22,500 $36,300 3 Revised net operating income (loss) $56,3001 Sales units Sales Variable expenses Contribution margin Fixed expenses Net operating income (Loss) Total 26,400 $712,800 $396,000 $316,8001 $260,5001 $56,300 per unit 13,200*2 $27 10% reduction in selling price $15 $12. (220,500+ 40,000) 4 Units to attain target net profit 15,646 Units Unit sales to achieve target profit Fixed cost + Target profit Contribution margin per unit $225,300 $14.40 15,646 Fixed cost Monthly profit Total Target $220,500 $4,8001 $225,3001 Selling price Variable cost Contribution margin per unit $30.00 $15.60 (15+$0.60) $14.40 New CM Ratio Break even point in units Break even point in Sales $ 60% 15,028 $450,833 Units Break even point in units Revised Fixed cost Contribution margin per unit $270,500 $18 15,028 Revised Fixed cost = 220,500+ 50,000 Sales $ Break even point in Sales $ Fixed cost Contribution margin % $270,5001 60% $450,833 Selling price Variable cost Contribution margin per unit Variable cost (Contribution/Sales)*100 $30 $12 (15-3) $18| 60% b Sales Variable expenses Contribution Fixed cost Operating Income Contribution Margin Income Statement Not Automated Automated Amount per unit % Amount per unit $624,000 $30 100% $624,000 $30 $312,000 $15 50% $249,600 $12. $312,000 $15 50% $374,400 $18 $220,500 $270,500 $91,500 $103,900 % 100% 40% 60% с Yes Operations should be automated since operating income is higher