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 (13,300 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 399,000 239,400 159,600 177,600 $ (18,000) 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 $7,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $80,000 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 $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 $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,300? 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 theyłore (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) Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg SA Reg 58 Reg 5C Compute the company's CM ratio and its break-even point in unit sales and dollar sales. (Do not round intermediate

Answer 1

1. CM Ratio= Contribution/Sales= 159600/399000= .40 of sales or 0.4:1

Break even point =

Contribution= Fixed Expenses

=> (159600/13300)x = 177600

=> 12x=177600

=> X= 14800 Units

Hence Break even units is 14800 and Break Even $(14800*30)= $444000.

2. Computation of net operating income if advertisement expenditure of $7000 is incurred:

Increase in sales (13300+80000/30)*30 $ 4,79,010

Total Variable cost (13300+80000/30)*18 $2,87,406

Contribution $1,91,604

Fixed Expense $1,77,600

Advertisement Expenses $7,000

Net operating Income $7004

Hence net increase in operating income is $7004.

3. Reduction in selling price (30-10%) $27

Increase in sales units (13300*2) 26,600

Hence total sales (26,600*27) $7,18,200

Variable Cost (26,600*18)   ($4,78,800)

Contribution   $2,39,400

Fixed Expenses $1,77,600

Advertisement Expenses       $34,000+$7000

Net operating income $20,800

Hence revise net operating income is $20,800

4. If profit is $4300

Contribution= Fixed expenses + Profit =1,77,600+4300=$1,81,900

Sales-V.C= Contribution =30-(18+.30)= 18.30

Hence 18.30x= $1,81,900

x=15547 Units

Sales= 15,547*30= $4,66,410

V.C = 15,547 (18+.30) $(2,84,510)

Contribution $1,81,900

Fixed Expenses $(1,77,600)

Profit $4300

Hence 15,547 units should be sold to earn profit of $4,300

5. a) Sales $3,99,000

Variable Expenses (15*13,300) $(1,99,500)

Contribution $1,99,500

Hence CM Ratio $1,99,500/$3,99,000 =0.5:1

Computation of break even units

Sales-Variable cost= Fixed Cost

(30-15)x= $1,77,600+$56,000

15x= $2,33,600

X= 15,573 Units

Sales= 15,573 Units

In $ = (15,573*30)= $4,67,190

b)Non Automated Automated

Particulars Unit Per Unit Amount   Particulars Unit Per Unit Amount

Sales 13300 30 $ 3,99,000 Sales 20,300 30 $6,09,000

V.C 13300 18 $ 2,39,400 V.C 20,300 15 $3,04,500

Cont 13300 12 $ 1,59,600 Contribution 20,300 15 $3,04,500

Fixed Expenses $ 1,77,600 Fixed Expense $2,33,600

Profit 13300 1.353 $(18,000) Profit 20,300    3.50 $70,900

c) Yes the company should automate the process as its lead to increase in profit of (-(18000)+70900)= $88,900