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 (12,500 units X $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating 1068 $ 250,000 125,000 125,000 140,000 $ (15,000) 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 $6,700 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 $39,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating 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 $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $5,000? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 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 20,700 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.)

PLEASE HELP

Answer 1

Answer :

(1) Company's CM Ratio = Contribution*100 / Sales

= $ 125000*100/ $ 250000

= 50 %

Break even point in unit = Fixed cost / Contribution per unit

= $ 140000/ $ 10

= 14000 unit

Contribution per unit = $ 125000/12500 unit = $ 10 per unit

Break even point in dollar sales = Fixed cost / CM ratio

= $ 140000 / 50 %

= $ 280000

(2) Increase in company's Net operating income = increase in sales * CM ratio - monthly advertising expenses

= $ 89000* 50 % - $ 6700

= $ 37800

(3) Computation of Revised net operating income

sales 25000 unit * $ 18	$ 450000
Less - Variable cost	$ 250000
Contribution	$ 200000
Less - Fixed Expenses	$ 140000
Less- Advertising ex	$ 39000
Net operating Income	$ 21000

New selling price = $ 20*90 % = $ 18

New unit sales = 12500*2= 25000 unit

Variable cost per unit = $ 125000/12500 = $ 10 per unit

(4) Number of unit sold = Desired contribution / Contribution per unit

= Fixed cost + Profit / Contribution per unit

= $ 140000 + $ 5000 / $ 9.30

= 15591 unit ( approx)

Contribution per unit = $ 10- $ 0.70 = $ 9.30

5 (a) New CM ratio = Contributionper unit*100 / sales per unit

= $ 13*100/$ 20

= 65 %

New variable cost per unit = $ 10- $ 3= $ 7

Contribution per unit = Sales per unit - Variable cost per unit

= $ 20- $ 7 = $ 13

New Break even point in unit = Fixed cost / contribution per unit

= $ 195000 / $ 13

= 15000 unit

New Break even point in Dollar sales = Fixed cost / CM ratio

= $ 195000 / 65 %

= $ 300000

New Fixed cost = $ 140000 + $ 55000 = $ 195000

5 (b) Alternative -1 Operation are not automated

	per unit	%	Total
Sales	$ 20	100 %	$ 414000
Less - variable cost	$ 10	50 %	$ 207000
Contribution Margin	$ 10	50 %	$ 207000
Less - Fixed cost			$ 140000
Net Operating Income			$ 67000

Alternative -1 Operation are automated

	per unit	%	Total
Sales	$ 20	100 %	$ 414000
Less - variable cost	$ 7	35 %	$ 144900
Contribution Margin	$ 13	65 %	$ 269100
Less - Fixed cost			$ 195000
Net Operating Income			$ 74100

5 (c) Company should Automate it's operation.