Question

mework 1 Seved Help Save & Exit Submit Check my work 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 * $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 254,000 127,000 127,000 142,000 $ (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 $6,900 Increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $89,000 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 $4,700? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $58,000 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 20,100 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 20,100 units)? < Prev 9 of 11 Next >

Answer 1

Requirement 1 Contribution Margin ratio Break even point in units Break even point in sales dollars Requirement 2 Increase in contribution marign (89000*50%) Less : Increase in advt costs Increase in net operating income $ $ $ 50% 14200 $ 284,000 Requirement 4 Unit sales to attain target profit = (Fixed cost + Target profit) / CM per unit (142000+4700)/9.30 44,500 (6,900) 37,600 15774 Units Note : Contribution Margin ratio 127000/254000 Note : CM per unit ; Seling Price Less : Revised variable cost Contribution margin per unit Requirement 3 Current Selling price Revised selling price = 20*90% $ $ 50% $ $ 20 18 20.00 (10.70) 9.30 Break even point in units = Fixed Cost / Cm per unit 142000/10 14200 Units Sales (12700*2*18) Less : Variable Costs (12700*2*10) Contribution margin Less : Fixed costs Net Operating income $ 457,200 $ (254,000) $ 203,200 $ (176,000 $ 27,200 CM per unit = 127000/12700 units $ 10 Break even point in sales dollars = Fixed Cost / Cm ratio 142000/50% 284000

Requirement 5a Requirement 506) Automated Contribution Margin ratio Break even point in units Break even point in sales dollars 65% 15385 $307,692 Total Contribution income Statement Not Automated Total Per Unit % 402,000 20 100% $ 201,000 10 50% $ 201,000 10 50% $ 142,000 $ 59,000 $ Sales (20100 Units) $ Variable Expenses $ Contribution margin $ Fixed costs $ Net Income Note : Selling Price Less : Revised variable cost Contribution margin per unit Per Unit% 20 100% 7 35% 13 65% 402,000 140,700 261,300 200,000 61,300 20 -7 13 Requirement 5(c.) Yes The Company should automate the operations Contribution Margin ratio 13/20*100 65% Break even point in units = Fixed Cost / Cm per unit (142000+58000)/13 15385 Break even point in sales dolars = Fixed Cost / Cm ratio (142000+58000)/65% 307692 Note : Please comment down for any further clarifications