Question

Copius Copy, Inc. produces cartridge toner for copy machines. Sales have been very erratic, with some months showing a profit, and some months showing a loss. The company’s contribution margin format income statement for the most recent month is given below:

Sales (13,600 units at $20 per unit) $272,000

Variable costs 190,000

Contribution Margin 82,000

Fixed costs 88,000

Net operating loss $ (6,000)

Required:

1. Compute the company’s CM ratio and its break-even point in both units and sales dollars.

2. The sales manager feels that an $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is correct, what will be the effect on the company’s net operating income or loss?

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. Prepare a new contribution margin format income statement, assuming that these changes are implemented.

4. Refer to the original data. The company’s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $.50 per unit. Assuming no other changes, how many units would need to be sold each month to earn a profit of $4,000?

5. Refer to the original data. By automating its production processes, the company could cut its variable costs in half. However, fixed costs would increase by $115,000 per month.

a. Compute the new CM ratio and break-even point, both in units and sales dollars.

b. Assume that the company expects to sell 20,000 units next month. Prepare two contribution margin format income statements, one assuming that operations are not

automated, and one assuming that they are automated. Would you recommend that the company automate its operations? Why, or why not?

Answer 1

part (1)

CM Ratio=Contribution margin/Sales

82000/272000

30%

Break even point=Fixed cost/ cotribution
Selling price per unit	20
Variable cost per unit 190000/13600	14
Contribution per unit	6
Hence,BEP in unit(88000/6)	14666.67
BEP in Value(14666.67*20)	293333.3

Part(2)

Effect of Advertisement on net income
Current sales	272000
Add:Proposed increase	70000
	342000
Less:Variable cost(190000+(20000/20*14)	211000
Contribution	131000
Less:Current fixed cost	88000
Less:Advertisement expense	8000
Net operating profit	35000
Operating profit has been icreased by 41000

Part(3)

10% reduction in the selling price, combined with an increase of $34,000
Current units sales	13600
Double of current sales	27200
Selling price (20-10% of 20)	18
Variable cost	14
Contrbution	4
Total contribution(27200*4)	108800
Less:Current fixed cost	88000
Less:Advertisement expense	34000
Net operating loss	-13200

Part (4)

No of unit to be sold when packaging costs by $.50 per unit and profit required is $4000
Selling price per unit	20
Variable cost per unit (14+.50)	14.5
Contribution per unit	5.5
Required contribution(Fixed cost+profit)
(88000+4000)	92000
No of units be sold is(92000/5.5)	16727.27273

Part(5)

Selling price per unit	20
Variable cost per unit (14*50%)	7
Contribution per unit	13
Total contribution(13600*13)	176800
Less:Current fixed cost	88000
Less:New fixed cost	115000
Net operating loss	-26200

part(5 a)

New CM ratio=13/20

0.65

New BEP(Fixed cost/Contribution
Fixed cost(88000+115000)	203000
new contribution	13
BEP	15615.38462

part(5 b)

Automated
Sales(20000*20)	400000
Variable cost(7)	140000
Contribution	260000
Less:Current fixed cost	88000
Less:New fixed cost	115000
Net profit	57000

Not automated
Sales(20000*20)	400000
Variable cost(14)	280000
Contribution	120000
Less:Current fixed cost	88000
Net profit	32000

It is recommended to automate the production,because it has extra profit than the non automation by 25000