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 (13,000 units × $30 per unit)	$	390,000
Variable expenses		195,000
Contribution margin		195,000
Fixed expenses		217,500
Net operating loss	$	(22,500	)

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 0.40 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,600? (Do not round intermediate calculations. Round final answer to the nearest whole unit.)

	Sales units

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. (Round "CM ratio" to the nearest whole percent and other answers to the nearest whole number.)

	CM ratio % Break-even point in units Break-even point in dollars

5b)

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. Assume that the company expects to sell 20,300 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.) (Do not round your intermediate calculations. Round your percentage answers to the nearest whole number.)

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	PEM, Inc. Contribution Income Statement Not Automated Automated Total Per Unit % Total Per Unit % Sales % % Variable expenses % % Contribution margin 0 $0 0 % 0 $0 0 % Fixed expenses Net operating income $0 $0

Answer 1

SOLUTION

4. Variable costs = $195,000 / 13,000 = $15

New variable costs = $15 + 0.40 = $15.40

Contribution margin = $30 - $15.40 = $14.60

Sales units = (Fixed costs + Targeted profits) / Contribution margin per unit

= ($217,500 + $4,600) / $14.60

= $222,100 / $14.60

= 15,212 units

5A.

New variable costs = $15 - $3 = $12

Contribution margin = $30 - $12 = $18

Fixed costs = $217,500 + $58,000 = $275,500

Contribution margin ratio = Contribution margin / Selling price

=$18 / $30 = 60%

Breakeven sales in units = Fixed costs / Contribution margin

= $275,500 / $18 = 15,306 units

Breakeven points in sales dollar = Fixed costs / Contribution margin ratio

= $275,500 / 60% = $459,167

5B. Contribution Income statement-

	Not Automated	Not Automated	Not Automated	Automated	Automated	Automated
	Total ($)	Per unit ($)	%	Total ($)	Per unit ($)	%
Sales (20,300 units)	609,000	30	100	609,000	30	100
Less: variable expenses	304,500	15	50	243,600	12	40
Contribution margin	304,500	15	50	365,400	18	60
Less: fixed expenses	217,500			275,500
Net operating income	87,000			89,900