Question

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 (13,100 units × $20 per unit)	$	262,000
Variable expenses		157,200
Contribution margin		104,800
Fixed expenses		116,800
Net operating loss	$	(12,000)

Required:

2. The president believes that a $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 increase in monthly sales. If the president is right, what will be the effect on the company’s monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

        

  

  3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $32,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

        

  

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by $0.60 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,300? (Do not round intermediate calculations and round your final answer to the nearest whole number.)  

        

  

  5. Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $58,000 each month.

  

a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Round your final answers to the nearest whole number.)

           

b. Assume that the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

           

c. Would you recommend that the company automate its operations?

         

	Yes
	No

Answer 1

Answer 2.
Statement of Incremental Profit
If Increase in Monthly Advertsing budget
Incremental Revenue
Increase in Contribution - 4,350 Units X $8	34,800.00
Incremental Costs
Fixed Advertising Expenses	6,700.00
Net Increase (decrease) in Operating Profits	28,100.00
Contribution per Unit = $104,800 (Total Contribution) / 13,100 Units (No. of Units Sold)
Contribution per Unit = $8 per unit
Increase in sale in Units = $87,000 (Increase in sales) / $20 (SP per unit)
Increase in sale in Units = 4,350 Units
Answer 3.
Contribution Format Income Statement
Sales - 26,200 Units X $18		471,600.00
Variable Costs - 26,200 Units X $12		314,400.00
Contribution		157,200.00
Fixed Exepenses	116,800.00
Advertising Expenses	32,000.00	148,800.00
Net Operating Income		8,400.00
Answer 4.
BEP (In Units + Target Profit) = (Fixed Cost + Target Profit) / Contribution Margin per Unit
Contribution Margin Per Unit = $20 - ($12 + $0.60)
Contribution Margin Per Unit = $7.40 per unit
BEP (In Units + Target Profit) = ($116,800 + $4,300) / $7.40
BEP (In Units + Target Profit) = $121,100 / $7.40
BEP (In Units + Target Profit) = 16,364.86 or say 16,365 Units (Approx.)
Answer 5-a.
Contribution margin Per Unit = $20 - $6 (Variable Cost)
Contribution margin Per Unit = $14 per Unit
Contribution Margin Ratio = Contribution / Sales
Contribution Margin Ratio = $14 / $20
Contribution Margin Ratio = 70%
Fixed Costs = $116,800 + $58,000 = $174,800
BEP (In Units) = Fixed Cost / Contribution Margin per Unit
BEP (In Units) = $174,800 / $14
BEP (In Units) = 12,485.71 units or say $12,486 Units (Approx.)
BEP (In $) = Fixed Cost / Contribution Margin Ratio
BEP (In $) = $174,800 / 70%
BEP (In $) = $249,714.29 or say $249,714 (approx.)
Answer 5-b.
Contribution Format Income Statement
	Operations
	Not Automated	Automated
Sales in Units	20,800.00	20,800.00
Sales	416,000.00	416,000.00
Less: Variable Costs	249,600.00	124,800.00
Contribution Margin	166,400.00	291,200.00
Fixed Expenses	116,800.00	174,800.00
Net Operating Profit	49,600.00	116,400.00
Answer 5-c.
Yes