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 (12,700 units × $30 per unit)	$	381,000
Variable expenses		190,500
Contribution margin		190,500
Fixed expenses		213,000
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 believes that a $6,400 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $88,000 per month. 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 $36,000 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 $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 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 20,700 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 20,700 units)?

• Req 1
• Req 2
• Req 3
• Req 4
• Req 5A
• Req 5B
• Req 5C

Compute the company’s CM ratio and its break-even point in unit sales and dollar sales. (Do not round intermediate calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23").

	CM ratio % Break-even point in unit sales Break-even point in dollar sales

The president believes that a $6,400 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $88,000 per month. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income? (Do not round intermediate calculations.)

	by

Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $36,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? (Losses should be entered as a negative value.)

	Revised net operating income (loss)

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 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400? (Do not round intermediate calculations. Round final answer to the nearest whole unit.)

Show less

	Unit sales to attain target profit

Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 each month. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. (Do not round intermediate calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23") and other answers to the nearest whole number.)

Show less

	CM ratio % Break-even point in unit sales Break-even point in dollar sales

Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 each month. Assume that the company expects to sell 20,700 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.)

Show less

	PEM, Inc. Contribution Income Statement Not Automated Automated Total Per Unit % Total Per Unit % % % % % 0 $0 0 % 0 $0 0 % $0 $0

Answer 1

1.

CM ratio	50	%	190,500 / 381,000
Break-even point in unit sales	14,200	units	426,000 / $30
Break-even point in dollar sales	426,000		213,000 / 50%

2.

Increase in Sales	88,000
Increase in Variable costs (50%)	44,000
Increase in cont margin (50%)	44,000
Increase in fixed expenses	6,400
Increase net operating income	37,600

Increase

by

$ 37,600

3.

Sales (25,400 * 27)	685,800
Less: Variable costs (25,400 * 15)	381,000
Contribution margin	304,800
Fixed expenses (213,000 + 36,000)	249,000
Net Operating income	55,800

4.

= (213,000 + 4,400) / (30 - 15.40)

= 217,400 / 14.60

= 14,890

Sales units

14,890

5.

Sales (12,700 units × $30 per unit)	$	381,000
Variable expenses (12,700 x $ 12)		152,400
Contribution margin		228,600
Fixed expenses (213,000 + 56,000)		269,000
Net operating loss	$	(40,400)

5a.

CM ratio	60	%	228,600 / 381,000
Break-even point in unit sales	14,944	units	448,333 / $30
Break-even point in dollar sales	448,333		269,000 / 50%

5b.

	Total	Per unit	%		Total	Per unit	%
Sales	621,000	30	100	%	621,000	30	100	%
Variable costs	310,500	15	50	%	248,400	12	40	%
Contribution margin	310,500	15	50	%	372,600	18	60	%
Fixed expenses	213,000				269,000
Net operating income	97,500				103,600

5c. YES