Question

In: Accounting

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...

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 (13,100 units × $20 per unit) $ 262,000
Variable expenses 131,000
Contribution margin 131,000
Fixed expenses 146,000
Net operating loss $ (15,000 )

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 $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 increase in monthly sales. 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 $31,000 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 $0.80 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,600?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $52,000 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 21,000 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 21,000)?

Solutions

Expert Solution

PEM.inc Company
Contribution Income Statement
Part 1
Particulars Amount Per Unit CMR
Sales(13100 units *$20) $262,000 $20
Less: Variable Cost $131,000 $10
Contribution $131,000 $10 50%
Less: Fixed Cost $146,000
Income ($15,000)
* CMR= Contribution Margin Ratio
Break Even point (In Dollars) Fixed Cost /CMR
     292,000
Break Even Point(In units) Fixed Cost/Contribution per unit
14600
Part 2
Particulars Amount Per Unit CMR
Sales(17500 units *$20) $350,000 $20
Less: Variable Cost $175,000 $10
Contribution $175,000 $10 50%
Less: Fixed Cost $152,600
Income $22,400
1 New Fixed Cost $152,600 (increased by $6600)
2 Sales $350,000 (increased by $88000)
Part 3
Particulars Amount Per Unit CMR
Sales $471,600 $18
Less: Variable Cost $262,000 $10
Contribution $209,600 $8 44%
Less: Fixed Cost $177,000
Income $32,600
1 New Selling price $18 ($20-10%)
2 No. of units $26,200 (13100*2)
3 New Fixed Cost $177,000 (increased by $31000)
Part 4
i Calculation of contribution per unit
Sales $20
Less: Variable Cost $10.80
Contribution $9
ii Calculatio of no.of units to earn a net profit of $4600
No. of units (Fixed Cost + Profit )/contribution per unit
16369.56522

Related Solutions

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (12,800 units × $30 per unit) $ 384,000 Variable expenses 192,000 Contribution margin 192,000 Fixed expenses 214,500 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...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (13,100 units × $30 per unit) $ 393,000 Variable expenses 196,500 Contribution margin 196,500 Fixed expenses 219,000 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...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (12,800 units × $20 per unit) $ 256,000      Variable expenses 128,000      Contribution margin 128,000      Fixed expenses 143,000      Net operating loss $ (15,000)    5. Refer to the original data. By automating, the company could reduce variable expenses in half....
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (13,400 units × $20 per unit) $ 268,000 Variable expenses 134,000 Contribution margin 134,000 Fixed expenses 149,000 Net operating loss $ (15,000 ) Required: 1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales. 2. The...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (12,800 units × $30 per unit) $ 384,000 Variable expenses 230,400 Contribution margin 153,600 Fixed expenses 171,600 Net operating loss $ (18,000 ) Required: 1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales. 2. The president...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 234,000 Contribution margin 156,000 Fixed expenses 174,000 Net operating loss $ (18,000 ) Required: 1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales. 2. The...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (13,100 units × $30 per unit) $ 393,000 Variable expenses 196,500 Contribution margin 196,500 Fixed expenses 219,000 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...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (13,500 units × $20 per unit) $ 270,000      Variable expenses 135,000      Contribution margin 135,000      Fixed expenses 150,000      Net operating loss $ (15,000)    Required: 1. Compute the company’s CM ratio and its break-even point in both unit sales and...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (12,500 units × $30 per unit) $ 375,000 Variable expenses 187,500 Contribution margin 187,500 Fixed expenses 210,000 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...
Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...
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 (12,700 units × $40 per unit) $ 508,000 Variable expenses 254,000 Contribution margin 254,000 Fixed expenses 284,000 Net operating loss $ (30,000) Required: 1. Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales. 2. The president believes...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT