Question

Weisel Inc has been having difficulty for several years. The company’s contribution format income statement for the most recent month is given below:

  

         
Sales (19,500 units × $30 per unit)   $   585,000
Variable expenses      409,500
Contribution margin      175,500
Fixed expenses      180,000
Net operating loss   $   (4,500)

  

Required:

1. Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales.

  

2. Jim Weisel, the president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 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.)

  

  

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

  

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the product would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750? (Do not round intermediate calculations.)

  

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month.

  

a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars.)

  

b. Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

  

c. Would you recommend that the company automate its operations?

  

   Yes
   No

Answer 1

Answer to Q1

CM Ratio : Contribution margin/Sales *100 ; 175,500/585,000*100 ;30%

Break Even dollar Sales = Fixed Cost/Contribution margin%
= $180,000/30%
= $600,000
Break even Units = $600,000/$30 ; 20,000 Units

Answer to Q2

Increase in Sales = $80,000
Increase in Contribution margin = $80,000*30% ; $24,000
Increase in monthly Cost = $16,000
Effect on Net operating income = $24,000-$16,000 ; $8,000

Answer to Q3

New Contribution Income Statement

Sales (39,000 x $27 per unit) $1,053,000
Variable expenses (39,000 x $21 per unit) $819,000
Contribution MArgin $234,000
Fixed Costs (180,000+60,000) $240,000
Net Operating loss $ (6,000)

Answer to Q4
Contribution margin per unit = $30 - $21.75 ($21 +0.75) ; $8.25 per unit

Units sales for $9,750 profit = (Fixed cost + Profit)/Contribution margin
= $180,000+$9,750)/$8.25
= 23,000 units
Answer to Q5

Selling price = $30 , New variable Cost = $21-$3 ; $18, New Fixed Costs =
$180,000+$72,000 ; $252,000

a) New CM ratio = ($30-$18)/$30 ; 40%

Break Even Units = $252,000/ ($30-$18) ; 21,000 units
Break even sales $ = $252,000/40% ; $630,000

b.

New Contribution Income Statement (without automatic)

Sales (26,000 x $30 per unit) $780,000
Variable expenses (26,000 x $21 per unit) $546,000
Contribution MArgin $234,000
Fixed Costs 180,000 $180,000
Net Operating Profit $54,000

New Contribution Income Statement (with automatic)

Sales (26,000 x $30 per unit) $780,000
Variable expenses (26,000 x $18 per unit) $468,000
Contribution MArgin $312,000
Fixed Costs 180,000 +72,000 $252,000
Net Operating Profit $60,000

C Yes because it provides additonal operating profit