Question

In: Accounting

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...

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 (12,900 units × $30 per unit) $ 387,000
Variable expenses 193,500
Contribution margin 193,500
Fixed expenses 216,000
Net operating loss $ (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 $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $81,000 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 (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 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 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 20,800 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 20,800)?

Solutions

Expert Solution

contribution margin per unit= 193500/12900
15
1) CM ratio = contribution/sales
193500/387000
50.00%
BEP(units) = total fixed cost/contribution margin per unit
216000/15
14400
BEP(dollars) = 14400*30
432000
CM ratio 50%
Break even point in units 14400
Break even point in dollars 432000
2) increase in contribution (81000*50%) 40500
less : increase in advertising budget 6,700
increase in net income 33,800
increases by 33,800
3) units = 12500*2 = 25800 units ; selling price = 30*90%=$27
Contribution Income statement
Sales (25800*27) 696600
Variable expense (25800*15) 387000
Contribution margin 309600
Fixed expenses 216000+32000 248,000
Net income 61,600
4) New contribution margin = 15-.50
14.5
BEP(units) = (total fixed cost+target profit)/contribution per unit
(216000+4400)/14.5
15200
Sales units 15,200
5)
CM ratio = contribution/sales
18/30
60.00%
BEP(units) = total fixed cost/contribution margin per unit
(216000+55000)/18
15056
BEP(dollars) = 271000/60%
451667
CM ratio 60%
Break even point in units 15056
Break even point in dollars 451667
20800 units
b) Not Automated Automated
total per unit % total per unit %
Sales 624000 30 100% 624000 30 100%
Variable expenses 312000 15 60% 249600 12 50%
Contribution margin 312000 15 40% 374400 18 50%
Fixed expenses 216,000 271,000
Net operating income 96,000 103,400
c) yes

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