Question

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)	$	254,000
Variable expenses		152,400
Contribution margin		101,600
Fixed expenses		113,600
Net operating loss	$	(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 $6,200 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 $33,000 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 $4,300?

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 20,200 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 20,200)?

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.							PEM
							Battery
Requirement 1							Laptop
Selling Price per unit		$               20
Less: Variable Cost per unit	$152,400/12,700	$              -12
Contribution Margin per unit		$                 8
Contribution Margin Ratio	$8/$20	40.00%
BEP in Units	$113,600/$8	14,200
BEP in Sales Dollars	$113,600/40%	$     284,000
Requirement 2
Incremental Contribution	$81,000 Sale*40% CM Ratio	$        32,400
Less: Incremental Advertising Cost		$        -6,200
Increase in Monthly Net Income		$        26,200
Requirement 3
New Sales Volume	12,700*2	25,400
New Selling Price	$20-10%	$               18
Sales	25,400 Units*$18	$     457,200
Less: Variable Cost	25,400 Units*$12	$    -304,800
Contribution Margin		$     152,400
Less: Fixed Cost	$113,600+$33,000	$    -146,600
Net Income		$          5,800
Existing Loss		$      -12,000
Increase in Income by		$        17,800
Requirement 4
Selling Price per unit		$               20
New Variable Cost per Unit	$10+$0.5	$        -10.50
Contribution Margin	A	$            9.50
Fixed Expense	B	$     113,600
Target Profit	C	$          4,300
No of Units to be Sold	(B+C)/A	12,411
Requirement 5A
Selling Price per unit		$               20
New Variable Cost per Unit	$12-$3	$           -9.00
Contribution Margin	A	$          11.00
Fixed Expense ($113,600+$58,000)	B	$     171,600
CM Ratio	$11/$20	55.00%
BEP in Units	$171,600/$11	15,600
BEP in Sales Dollars	$171,600/55%	$     312,000
Requirement 5B
		Not Automated				Automated
		Total	Per unit	%		Total	Per unit	%
Sales	20,200*$20	$     404,000	$               20	100%		$ 404,000	$         20	100%
Less: Variable Expense	20,200*$12 & 9	$    -242,400	$              -12	-60%		$-181,800	$          -9	-45%
Contribution Margin		$     161,600	$                 8	40%		$ 222,200	$         11	55%
Less: Fixed Expense		$    -113,600				$-171,600
Net Income		$        48,000				$    50,600
Requirement 5C
Yes as Net income is more in this case