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 (12,700 units X $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 254,000 152,400 101,600 113,600 $ (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 $6,900 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 $4,800? 5 Defer to the criminal

Answer 1

Requirement 1 Contribution Margin ratio Break even point in units Break even point in sales dollars Requirement 2 Increase in contrbution marign (85000*40%) $ Less : Increase in advt costs $ Increase in net operating income $ Requirement 4 Unit sales to attain target profit = (Fixed cost + Target proft) / CM per unit (113600+4800)/7.4 40% 14200 284,000 34,000 (6,900) 27,100 16000 Units $ Note: Contribution Margin ratio 101600/254000 Note : CM per unit; Seling Price Less : Revised variable cost Contribution margin per unit Requirement 3 Current Selling price Revised seling price = 20*90% 40% $ $ 20 18 $ $ $ 20.00 (12.60) 7.40 Break even point in units = Fixed Cost / Cm per unit 113600/8 14200 Units Sales (12700*2*18) Less : Variable Costs (12700*2*12) Contribution margin Less : Fixed costs Net Operating income $ 457,200 $ (304,800) $ 152,400 $ (147,600) $ 4,800 CM per unt = 101600/12700 units $ 8 Break even point in sales dollars = Fixed Cost / Cm ratio 113600/40% 284000

Requirement 5(a) Requirement 5(b) Automated Contribution Margin ratio Break even point in units Break even point in sales dollars 55% 14964 299,273 Total Total $ Contribution income Statement Not Automated Per Unit % 406,000 20 100% $ 243,600 12 60% $ 162,400 8 40% $ 113,600 $ 48,800 $ Sales (20300 Units) $ Variable Expenses $ Contribution margin $ Fixed costs $ Net Income $ Note: Selling Price Less : Revised variable cost Contribution margin per unit Per Unit % 20 100% 9 45% 11 55% 406,000 182,700 223,300 164,600 58,700 20 -9 11 Requirement 5(c.) Yes The Company should automate the operations Contribution Margin ratio 5/20. 55% Break even point in units = Fixed Cost / Cm per unit (113600+51000)/11 14964 Break even point in sales dollars = Fixed Cost / Cm ratio (113600+51000)/55% 299273 Note: Please comment down for any further clarifications