Question

Faxmatic, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below:

Sales (19,500 units at $80 per unit)	$	1,560,000
Variable expenses		936,000
Contribution margin		624,000
Fixed expenses		640,000
Net operating loss	$	(16,000)

Required:
1.	Compute the company's CM ratio and its break-even point in both units and dollars.

     

2.	The sales manager feels that a $7,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $92,000 increase in monthly sales. If the sales manager 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 president is convinced that a 10% reduction in the selling price, combined with an increase of $90,000 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 company’s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $1.6 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $5,600? (Do not round intermediate calculations. Round your final answer to the nearest whole number.)

   

5.	Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $129,000 per month.

   

a.	Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round your intermediate calculations. Round up your final break even answers to the nearest whole number.)

     

b.	Assume that the company expects to sell 22,700 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Round "Per unit" answers to 1 decimal place.)

        

Answer 1

Requirement 1:

CM ratio = Contribution margin/Sales = 624000/1560000 = 40%

BEP in units = Fixed expenses/(SP- VC) = 640000/(80-48) = 20,000 units

BEP in dollars = Fixed expenses/contribution margin = 640000/40% = $ 1,600,000

Requirement 2:

Particulars	Amount($)
Sales	1652000
variable expenses	991200
Contribution margin	660800
fixed expenses	647600
operating income	13200

Requirement 3:

Particulars	Amount($)
Sales	2808000
variable expenses	1872000
Contribution margin	936000
Fixed expenses	730000
operating income	206000

Requirement 4:

Units to be sold to earn a profit of $ 5600 = (640000+5600)/(80-49.6) = 21237 units

Requirement 5:

a). New CM Ratio = (80-24)/80 = 70%

BEP in units = 769000/56 = 13733 units

BEP in dollars = 769000/70% = $ 1,098,572

b).

Particulars	With Automation	Without Automation
Sales	1816000	1816000
Variable Expenses	544800	1089600
Contribution margin	1271200	726400
Fixed expenses	769000	640000
operating income	502200	86400