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 (13,500 units * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 270,000 135,000 135,000 150,000 $ (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 $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $85,000 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 $34,000 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 to be sold each month to attain a target profit of $4,900? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses

Answer 1

Requirement 1: Calculation of BEP & CM ratio: CM ratio = Contribution margin / Sales = $135,000 / $270,000 = 50% break-even point in unit sales = Fixed expenses / CM per unit = $150,000 / $10 = 15000 units Breakeven point in dollar sales – Fixed expenses / CM ratio = $150,000 / 50% = $300,000 Requirement 2: increase (decrease) operating income = Increase in contribution margin - Increase in advertising expenses = ($85,000*50%) - $6,800 = $35700 Requirement 3: New selling price per unit = $20*90% = $18 New CM per unit = $10 - $2 = $8 per unit New fixed costs = $150,000 + $34,000 = $184,000 New sales volume = 13500*2 = 27000 units New operating income = Contribution margin - Fixed costs = (27000*$8) - $184,000 = $32000 Requirement 4: New contribution margin per unit = $10 - $0.60 = $9.4 per unit Target income = $4,900 8 Nos of units to be sold to attain target profit = (Fixed cost + Net operating income) / CM per unit = ($150,000+ $4,900) / $9.4 = 16479 units Requirement 5a: New CM per unit = $10 +$3 = $13 per unit New fixed costs = $150,000 + $53,000 = $203,000 New CM ration = $13 / $20 = 65% New break even point in units = $203,000 / $13 = 15615 units Breakeven point in dollar sales = $203,000/65% = $312,308 Requirement 5b: Contribution income statement - Operation Automated Particulars Per unit % Total Sales 20 100.00% 410000 Variable costs 7 35.00% 143500 Contribution mar 13 65.00% 266500 Fixed costs 203000 Net operating income 63500 Contribution income statement - Operation not Automated Particulars Per unit % Total Sales 20 100.00% 410000 Variable costs 10 50.00% 205000 Contribution mar 10 50.00% 205000 Fixed costs 150000 Net operating income 55000 Requirement 5c: Yes * Kindly Comment down for any clarifications/ queries and please upvote.