Question

Tracey Incorporated has been experiencing difficulty for some time due to erratic sales of its only product. The company’s contribution format income statement for the most recent month is given below:

	Total	Per Unit	Percent of Sales
Sales (19,500 units)	$585,000
Variable expenses	409,500
Contribution margin	175,500
Fixed expenses	180,000
Net operating loss	($4,500)

1. Complete the table above with the per unit information and the percent of sales information.

2. The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, what will be the effect on the company’s monthly net operating income or loss?

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? Should the changes be adopted?

	Total	Per Unit	Percent of Sales
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the product would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750?

5. Refer to the original data. By automating, the company could reduce variable expense by $3 per unit. However, fixed expenses would increase by $72,000 each month. Assuming that the company expects to sell 26,000 units next month, prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

NOT AUTOMATED

	Total	Per Unit	Percent of Sales
Sales (26,000 units)
Variable expenses
Contribution margin
Fixed expenses
Net operating income

AUTOMATED

	Total	Per Unit	Percent of Sales
Sales (26,000 units)
Variable expenses
Contribution margin
Fixed expenses
Net operating income

1. Computer the break-even point in both units sales and dollar sales for both the Not Automated and the Automated scenarios.

2. Computer the margin of safety in units, dollars, and percentage for both the Not Automated and the Automated scenarios.

3. Computer the degree of operating leverage for both the Not Automated and the Automated scenarios.

4. Compute the unit sales volume at which the net operating income is the same for either metho (This would be ‘the point of indifference’ and it is computed by taking the difference in the fixed expenses and dividing it by the difference in the variable expenses per unit.)

5. Would you recommend that the company automate its operations? Explain.

Answer 1

		a) Original	Req.3 10% red in SP and increase in add cost, double uniit sales	Req: 5 ahalf variable cost and increse in fixed cost by $59000
No. of units N		12600	12600	12600
Addition in units			12600
Total Units   T			25200
Selling Price			36
Variable expenses per unit V/N		20	20
Sales (12,600 units × $40 per unit) S	$	504000	907200	504000
Variable expenses   V		252000	504000	126000
Contribution margin   C		252000	403200	378000
Fixed expenses F		282000	317000	341000
Net operating Income/(loss)	$	-30000	86200	37000
Contribution per unit Contribution Margin/No. of units sold   D=C/N		20		30
CM Rato=Contribution Margin/Sales R=C/S		0.5		0.75
Breakeven in units= Fixed Cost/Contribution per unit    F/D		14100		11367
in $=Fixed Asset/CM ratio F/R		564000		454667
Ans 2
No. of incrementa units 83000/40		2075
Incremental sales		83000
Less: Incremental variable cost (2075*20)		41500
Contribution margin   C		41500
Inv=cremental Fixed expenses F		7000
Net operating Inocme	$	34500
Ans 4
No. of units to be sold= 282000+4900/(40-20.6)		14788.65979
		14789	units
Ans 5 b
No. of units	21000
	Non Automated				Automated
	Total	per unit	%	Total	per unit	%
Sales (21000 units)	840000	40	100	840000	40	80
Variable expenses   V	420000	20	50	210000	10	20
Contribution margin   C	420000	20	50	630000	30	60
Fixed expenses F	282000			341000
Net operating Income/(loss)	138000			289000
No. of units	26000
	Non Automated				Automated
	Total	per unit	%	Total	per unit	%
Sales (216000 units)	1040000	40	100	1040000	40	80
Variable expenses   V	520000	20	50	260000	10	20
Contribution margin   C	520000	20	50	780000	30	60
Fixed expenses F	282000			341000
Net operating Income/(loss)	238000			439000
Note Ans 1,3 and 5 a is in the table which is at the topmost of the solution
and in 5 b sales in units is mentioned 21000 and 26000 I have done from both