In: Accounting
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 (13,000 units × $40 per unit) | $ | 520,000 |
Variable expenses | 312,000 | |
Contribution margin | 208,000 | |
Fixed expenses | 232,000 | |
Net operating loss | $ | (24,000) |
1.) The president believes that a $6,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $81,000 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.)
Increse by ?
2.)
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b. |
Assume that the company expects to sell 20,900 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. |
Contribution Income Statement
Not Automated Automated
Total Per Unit % Total Per Unit %
Sales ??????? $40 100% ??????? $40 100%
Variable expenses ??????? $24 60% ??????? $12 30%
Contribution margin ??????? $16 40% ??????? $28 70%
Fixed expenses 232,000 ??????
Net operating income $(232,000)
Answer 1 | ||||||
Computation of company’s monthly net operating income or loss | ||||||
Present | Proposed | Increase / (decrease) in Income by | ||||
Sales | $520,000.00 | $601,000.00 | ||||
Less : Variable Expenses (60% of sales) | $312,000.00 | $360,600.00 | ||||
Contribution Margin | $208,000.00 | $240,400.00 | ||||
Less : Fixed Expenses | $232,000.00 | $238,500.00 | ||||
Net Operating Income / (loss) | -$24,000.00 | $1,900.00 | $25,900.00 | |||
Increase in Income by $25,900 | ||||||
Variable expense % = $312000 / $520000 = 60% | ||||||
Answer 2-a | ||||||
Contribution ratio after automation = (Sales - Variable expense)/Sales = ($520000 - $156000)/$520000 = 70% | ||||||
Break even point in units = Fixed expenses / Contribution Margin per unit | ||||||
Contribution Margin per unit = (sales * CM ratio) / No.of units sold = ($520000*70%)/13000 units = $28 per unit | ||||||
Break even point in units = [$232000 + $55000]/$28 = 10250 units | ||||||
Break even point in dollars = Break even point in units * selling price per unit = 10250 units * $40 = $4,10,000 | ||||||
Answer 2-b | ||||||
Contribution Income statement | ||||||
Not Automated | Automated | |||||
Total | Per unit | % | Total | Per unit | % | |
Sales | $836,000.00 | $40.00 | 100% | $836,000.00 | $40.00 | 100% |
Less : Variable Expenses | $501,600.00 | $24.00 | 60% | $250,800.00 | $12.00 | 30% |
Contribution Margin | $334,400.00 | $16.00 | 40% | $585,200.00 | $28.00 | 70% |
Less : Fixed Expenses | $232,000.00 | $287,000.00 | ||||
Net operating Income | $102,400.00 | $298,200.00 | ||||