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 (13,400 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 both unit sales and dollar sales.

2. The president believes that a $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $86,000 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 $35,000 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 $0.50 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,700? (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 $59,000 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 20,500 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

	contribution margin per unit=			134000/13400
				10
1)	CM ratio = contribution/sales
		134,000/268,000
		50.00%
	BEP(units) = total fixed cost/contribution margin per unit
		149000/10
		14900
	BEP(dollars) = 14900*20
		298000
	CM ratio			50%
	Break even point in units			14900
	Break even point in dollars			298000
2)	increase in contribution			(86000*50%)		43000
	less : increase in advertising budget					6,300
	increase in net income					36,700
	increases by		36,700
3)	units = 13400*2 =		26800 units ; selling price = 20*90%=$18
		Contribution Income statement
	Sales	(26800*18)			482400
	Variable expense		(26800*10)		268000
	Contribution margin				214400
	Fixed expenses		(149000+35000)		184,000
	Net income				30,400
4)	New contribution margin = 10-.50
			9.5
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(149000+4700)/9.5
		16178.95
	Sales units		16,179
5)
	CM ratio = contribution/sales
		15/20
		75.00%
	BEP(units) = total fixed cost/contribution margin per unit
		(149000+59000)/15
		13867
	BEP(dollars) =		208000/75%
		277333
	CM ratio			75%
	Break even point in units			13867
	Break even point in dollars			277333
			20500 units
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		410000	20	100%	410000	20	100%
	Variable expenses		205000	10	50%	102500	15	25%
	Contribution margin		205000	10	50%	307500	5	75%
	Fixed expenses		174,000			208,000
	Net operating income		31,000			99,500
c)		yes