Question

Memofax, Inc. produces memory enhancement software for computers. 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 (12,500 units at $20 per unit)	$	250,000
Less: Variable expenses		150,000
Contribution margin		100,000
Less: Fixed expenses		106,000
Net operating loss	$	(6,000)

Required:

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

  

2.

The sales manager feels that an $10,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $80,000 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 $46,000 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 $0.5 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $6,500? (Do not round intermediate calculations.)

      

  

5.	Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $92,800 per month.

a.	Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round "Contribution Margin Ratio" to 2 decimal places.)

            

b.	Assume that the company expects to sell 20,000 units next month. Prepare two contribution format income statements: one assuming that operations are not automated, and one assuming that they are. (Do not round intermediate calculations. Round "Per Unit" and "Percentage" to 2 decimal places.)

            

Answer 1

REQUIRED 1

Contribution margin (CM) ratio = Contribution margin / Sales

= 100,000 / 250,000

= 0.4

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Variable expenses per unit = Variable expenses / Number of units

= 150,000 / 12,500

= 12

Contribution margin per unit = Selling price per unit - Variable expenses per unit

= 20 - 12

= 8

Breakeven point in units = Fixed expenses / Contribution margin per unit

= 106,000 / 8

= 13,250 units

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Breakeven point in dollars = Fixed costs / Contribution margin ratio

= 106,000 / 0.4

= 265,000

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REQUIRED 2

Increase in sales = 80,000

Increase in expenses = 10,000

Effect on company's monthly net operating income = Increase in sales - Increase in expenses

= 80,000 - 10,000

= 70,000

Operating income increases by 70,000.

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REQUIRED 3

Contribution format Income Statement

Sales [25,000units * 18 per unit]	450,000
Variable expenses [25,000 units * 12 per unit]	300,000
Contribution margin	150,000
Fixed expenses [106,000+46,000]	152,000
Net operating loss	(2,000)

* Units sold = 12,500 * 2 = 25,000

* Selling price per unit = 20 - (20*10%) = 18

* Variable expenses per unit = 150,000 / 12,500 = 12

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REQUIRED 4

Selling price per unit = 20

Variable expenses per unit = 150,000 / 12,500 = 12

Increased variable expenses per unit = 12 + 0.5 = 12.5

Contribution margin per unit = Selling price per unit - Variable expenses per unit

= 20 - 12.5

= 7.5

Units to be sold to earn desired profit = (Fixed expenses + Desired profit) / Contribution margin per unit

= (106,000 + 6,500) / 7.5

= 15,000 units

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REQUIRED 5

a.

Sales = 250,000

Variable expenses = 150,000 / 2 = 75,000

Contrinution margin = Sales - Variable expenses

= 250,000 - 75,000

= 175,000

Contribution margin ratio = Contribution margin / Sales

= 175,000 / 250,000

= 0.7

Contribution margin per unit = Contribution margin / Number of units

= 175,000 / 12,500

= 14

Fixed expenses = 106,000 + 92,800 = 198,800

Breakeven point in units = Fixed expenses / Contribution margin per unit

= 198,800 / 14

= 14,200 units

Breakeven point in dollars = Fixed expenses / Contribution margin artio

= 198,800 / 0.7

= 284,000

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B.

Contribution format Income Statement

Sales [20,000 units * 20 per unit]	400,000
Variable expenses [20,000 units * 12 per unit]	240,000
Contribution margin	160,000
Fixed expenses	106,000
Net operating income	54,000

* Variable expenses per unit = 150,000 / 12,500 units = 12  

Contribution format Income Statement

Sales [20,000 units * 20 per unit]	400,000
Variable expenses [20,000 units * 6 per unit]	120,000
Contribution margin	280,000
Fixed expenses [106,000+92,800]	198,800
Net operating income	81,200

* Variable expenses per unit = 12 / 2 = 6