Question

Due to the erratic sales of its sole product – a high capacity battery for laptop computers – MEP Ltd, has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below: Sales (19,500 units x $30 unit) Less: variable expenses Contribution Less: Fixed costs Net operating loss Required $ 585,000 409,500 175,500 180,000 (4,500) a. Compute the company C/S CM ratio and its break-even point in both units and dollars b. The president believes that a $16,000 increase in the monthly advertising budget, combined with the 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 profit or loss? c. Refer to 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 cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted? d. Refer to the original data; the marketing department thinks that a fancy new package for the laptop computer batter would help sales. The new package would increase packaging cost by $0.75 per unit. Assuming no other changes, how many units would have to be sold each month to earn profit of $9,750? e. Refer to original data. By automating certain operation, the company could reduce variable cost by $3 per unit. However, fixed costs would increase by $72,000 each month. 1. Compute the new C/S CM ratio and the new break-even point in both units and dollars 2. Assume the company expects to sell 26,000 units next month. Prepare two 2 contribution format income statements, one assuming that operations are not automated and one assuming they are.

Answer 1