Question

Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (12,700 units < $40 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 508,000 254,000 254,000 284,000 (30,000) Required: 1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales. CM ratio Break-even point in units Break-even point in dollars 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 effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.) by

Answer 1

	contribution margin per unit=			254000/12700
				20
1)	CM ratio = contribution/sales
		254000/508000
		50.00%
	BEP(units) = total fixed cost/contribution margin per unit
		284000/20
		14200
	BEP(dollars) = 14200*40
		568000
	CM ratio			50%
	Break even point in units			14200
	Break even point in dollars			568000
2)	increase in contribution			(85000*50%)		42500
	less : increase in advertising budget					6,800
	increase in net income					35,700
	increases by		35,700
3)	units = 12700*2 =		25400 units ; selling price = 40*90%=$36
		Contribution Income statement
	Sales	(25400*36)			914400
	Variable expense		(25400*20)		508000
	Contribution margin				406400
	Fixed expenses		(284000+32000)		316,000
	Net income				90,400
4)	New contribution margin = 20-.50
			19.5
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(284000+4500)/19.5
		14794.87
	Sales units		14,795
5)
	CM ratio = contribution/sales
		30/40
		75.00%
	BEP(units) = total fixed cost/contribution margin per unit
		335000/30
		11167
	BEP(dollars) =		335000/75%
		446667
	CM ratio			75%
	Break even point in units			11167
	Break even point in dollars			446667
			20400
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		816000	40	100%	816000	40	100%
	Variable expenses		408000	20	60%	204000	10	50%
	Contribution margin		408000	20	40%	612000	30	50%
	Fixed expenses		284,000			335,000
	Net operating income		124,000			277,000
c)		yes