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 (12,800 units $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 384,000 192,000 192,000 214,500 $ (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 $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 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 $32,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income foss)? 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 $0.50 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 $59,000 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 20,400 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 20.400)?

Answer 1

Requirement 1 Contribution Margin ratio Break even point in units Break even point in sales dollars Requirement 2 Increase in contribution marign (88000*50%) Less : Increase in advt costs Increase in net operating income 50% 14300 $ 429,000 $ $ $ Requirement 4 Unit sales to attain target profit = (Fixed cost + Target proft) / CM per unit (214500+4200)/14.30 44,000 (6,300) 37,700 15294 Units Net Income Increase by $35,400 Note : Contribution Margin ratio 192000/384000 Note : CM per unit; Selling Price Less : Revised variable cost Contribution margin per unit Requirement 3 Current Selling price Revised selling price = 30*90% 50% $ $ 30 27 $ $ $ 30.00 (15.70) 14.30 Break even point in units = Fixed Cost / Cm per unit 214500/15 14300 Units Sales (12800*2*27) Less : Variable Costs (12800*2*15) Contribution margin Less : Fixed costs Net Operating income $ 691,200 $ (384,000 $ 307,200 $ (246,500 $ 60,700 CM per unit = 192000/12800 units $ 15 Break even point in sales dolars = Fixed Cost / Cm ratio 214500/50% 429000

Requirement 5a) Requirement 5(b) Automated Contribution Margin ratio Break even point in units Break even point in sales dolars 60% 15194 $455,833 Total Total Contribution income Statement Not Automated Per Unit % 612,000 30 100% $ 306,000 15 50% $ 306,000 15 50% $ 214,500 $ 91,500 $ 612.000 244,800 Sales (20400 Units) $ Variable Expenses $ Contribution margin $ Fixed costs $ Net Income $ Per Unit % % 30 100% 12 40% 18 60% Note: 367,200 Seling Price Less : Revised variable cost Contribution margin per unit 30 -12 18 273,500 93,700 Requirement 5(c.) Yes The Company should automate the operations Contribution Margin ratio 18/30 60% Break even point in units = Fixed Cost / Cm per unt (214500+59000)/18 15194 Break even point in sales dollars = Fixed Cost / Cm ratio (214500+59000)/60% 455833 Note : Please comment down for any further clarifications