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 (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)?

Answer 1

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 Next > < Previous Related Solutions 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 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. 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