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 (13,100 units × $20 per unit) | $ | 262,000 | |
| Variable expenses | 157,200 | ||
| Contribution margin | 104,800 | ||
| Fixed expenses | 116,800 | ||
| 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 $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 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 $38,000 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 $4,900?
5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $51,000 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)?
Solutions
Expert Solution
| 1 | CM Ratio = Contribution Margin / Sales | ||||||
| =104,800 / 262,000 | |||||||
| = 40% | |||||||
| Break Even Point ( in unit sales ) = Fixed Expenses / Contribution margin per unit | |||||||
| =116,800 / ( 20 -12 ) | |||||||
| =14,600 units | |||||||
| Break Even Point ( in dollar ) = Fixed Expenses / CM Ratio | |||||||
| = 116,800 / 40% | |||||||
| = $ 292,000 | |||||||
| 2 | $ | ||||||
| Incremental Contribution Margin ( $ 88,000 * 40% ) | 35,200 | ||||||
| Less : Increased advertising expenses | 6,600 | ||||||
| Increase in Net Operating Income | 28,600 | ||||||
| 3 | New Sale Price = $ 20 - ( $ 20*10%) = $ 18 | ||||||
| New Sales Volume = 13,100 *2 =26,200 units | |||||||
| New Income Statement | |||||||
| $ | |||||||
| Sales ( 26,200 * $ 18 ) | 471,600 | ||||||
| Variable Cost ( 26,200 * $ 12 ) | 314,400 | ||||||
| Contribution Margin | 157,200 | ||||||
| Fixed Expenses | 154,800 | ||||||
| Net Operating Income | 2,400 | ||||||
| 4 | Profit = Unit CM * Q - Fixed Expenses | ||||||
| $ 4,900 = ( $ 20 - $ 12.50 ) * Q - $ 116,800 | |||||||
| $ 4900 = 7.50Q -116,800 | |||||||
| Q = 16,227 units | |||||||
| 5 | |||||||
| a | CM Ratio = Contribution Margin / Sales | ||||||
| = ( 11 / 20)*100 | |||||||
| = 55% | |||||||
| $ | |||||||
| Sales Price per Unit | 20 | ||||||
| Variable Cost per unit | 9 | ||||||
| Contribution Margin | 11 | 0.55 | |||||
| Break Even Point ( in unit sales ) = Fixed Expenses / Contribution margin per unit | |||||||
| =167,800 / 11 | |||||||
| * | =15,255 units | ||||||
| New Fixed Expenses = 116,800 + 51,000 = $ 167,800 | |||||||
| Break Even Point ( in dollar ) = Fixed Expenses / CM Ratio | |||||||
| = 167,800 / 55% | |||||||
| = $ 305,091 | |||||||
| b | Contribution Income Statement | ||||||
| Not Automated | Automated | ||||||
| Per unit | Total | % | Per unit | Total | % | ||
| Sales | 20 | 404,000 | 100 | 20 | 404,000 | 100 | |
| Variable Cost | 12 | 242,400 | 60 | 9 | 181,800 | 45 | |
| Contribution Margin | 8 | 161,600 | 40 | 11 | 222,200 | 55 | |
| Fixed Cost | 116,800 |
 ekkarill92 answered 2 years agoRelated SolutionsDue 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 (12,800 units × $30 per unit)
$
384,000
Variable expenses
192,000
Contribution margin
192,000
Fixed expenses
214,500
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...
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 (13,100 units
× $30 per unit)
$
393,000
Variable expenses
196,500
Contribution margin
196,500
Fixed expenses
219,000
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...
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 difficulty
for some time. The company’s contribution format income statement
for the most recent month is given below:
Sales (12,800 units × $20 per unit)
$
256,000
Variable expenses
128,000
Contribution margin
128,000
Fixed expenses
143,000
Net operating loss
$
(15,000)
5.
Refer to the original data. By automating, the company could
reduce variable expenses in half....
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 (13,400 units × $20 per unit)
$
268,000
Variable expenses
134,000
Contribution margin
134,000
Fixed expenses
149,000
Net operating loss
$
(15,000
)
Required:
1. Compute the company’s CM ratio and its break-even point in
unit sales and dollar sales.
2. The...
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 (12,800 units × $30 per unit)
$
384,000
Variable expenses
230,400
Contribution margin
153,600
Fixed expenses
171,600
Net operating loss
$
(18,000
)
Required:
1. Compute the company’s CM ratio and its break-even point in
unit sales and dollar sales.
2. The president...
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 (13,000 units × $30 per unit)
$
390,000
Variable expenses
234,000
Contribution margin
156,000
Fixed expenses
174,000
Net operating loss
$
(18,000
)
Required:
1. Compute the company’s CM ratio and its break-even point in
unit sales and dollar sales.
2. The...
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 (13,100 units × $30 per unit)
$
393,000
Variable expenses
196,500
Contribution margin
196,500
Fixed expenses
219,000
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...
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 difficulty
for some time. The company’s contribution format income statement
for the most recent month is given below:
Sales (13,500 units × $20 per unit)
$
270,000
Variable expenses
135,000
Contribution margin
135,000
Fixed expenses
150,000
Net operating loss
$
(15,000)
Required:
1.
Compute the company’s CM ratio and its break-even point in both
unit sales and...
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 (12,500 units × $30 per unit)
$
375,000
Variable expenses
187,500
Contribution margin
187,500
Fixed expenses
210,000
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...
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 difficulty
for some time. The company’s contribution format income statement
for the most recent month is given below: Sales (12,700 units × $40
per unit) $ 508,000 Variable expenses 254,000 Contribution margin
254,000 Fixed expenses 284,000 Net operating loss $ (30,000)
Required: 1. Compute the company’s CM ratio and its break-even
point in both unit sales and dollar sales. 2. The president
believes...
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