Question

Saved Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure (LO5- LO5-3, LO5-4, LO5-5, LO5-6] 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 $6,300 Increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 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 $40,000 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 $0.50 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 21,000 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 21.000)? < Prey 3 of 12 Next >

Answer 1

1. Computation of CM ratio and breakeven point in unit sales and dollar:

CM ratio= Contribution margin× 100/sales

= 101,600×100/254,000

= 40%

Breakeven point in unit sales = Fixed cost/CM per unit

= 113,600/8

=14,200 units

Breakeven point in dollars= Fixed cost/Cm ratio

= 113,600/40%

=284,000

2.

Contribution margin statement

	Total	per unit
Sales (254,000+87,000)units 17,050	341,000	20
Variable 17050×12	204,600	12
Contribution margin	136,400	8
Fixed cost (113,600+6,300)	119,900
Operating income	16,500

Income increase by (12,000+16,500)=28,500

3.

Contribution margin statement

	Total	per unit
Sales(12,700units ×2)25400 unit	457,200	18
Variable cost	304,800	12
Contribution margin	152,400	6
Fixed cost (113,600+40,000)	153,600
Net operating loss	(1,200)

Loss = 1,200

4. Desired sales= ( Fixed cost+ profit)/CM per unit

= (113,600+4,700)/7.5 per unit

= 15,773 units

Cm per unit= sales - variable

= 20 - (12+0.5)= 7.5 per unit

5.a CM ratio = (sales - variable)/sales

=(20-9)/20

=55%

Breakeven point in unit sales= Fixed cost/CM per unit

= (113,600+58,000)/11

=15,600 units

Breakeven point in dollars= Fixed cost/CM ratio

=171,600/55%

=312,000

5.b

Contribution margin statement ( operations not automated)

	Total	per unit	percentage
Sales (21,000 units)	420,000	20	100%
Variable cost	252,000	12	60%
Contribution margin	168,000	8	40%
Fixed cost	113,600
Profit	54,400

Contribution margin statement (operations automated)

	total	per unit	percentage
Sales 21,000 units	420,000	20	100%
Variable cost	189,000	9	45%
Contribution margin	231,000	11	55%
Fixed expenses (113,600+58,000)	171,600
Operating income	59,400

5.c company should automate it's operations.