Question

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—TECH, 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 (12,700 units × $30 per unit)	$	381,000
Variable expenses		190,500
Contribution margin		190,500
Fixed expenses		213,000
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 believes that a $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $85,000 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 $36,000 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 0.60 cents 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 $57,000 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 20,300 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 20,300)?

Answer 1

	contribution margin per unit=			190500/12700
				15
1)	CM ratio = contribution/sales
		190500/381000
		50.00%
	BEP(units) = total fixed cost/contribution margin per unit
		213000/15
		14200
	BEP(dollars) = 14200*30
		426000
	CM ratio			50%
	Break even point in units			14200
	Break even point in dollars			426000
2)	increase in contribution			(85000*50%)		42500
	less : increase in advertising budget					6,100
	increase in net income					36,400
	increases by		36,400
3)	units = 12700*2 =		25400 units ; selling price = 30*90%=$27
		Contribution Income statement
	Sales	(25400*27)			685800
	Variable expense		(25400*15)		381000
	Contribution margin				304800
	Fixed expenses		(213000+36000)		249,000
	Net income				55,800
4)	New contribution margin = 15-.60
			14.4
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(213000+4600)/14.4
		15111.11
	Sales units		15,111
5)
	CM ratio = contribution/sales
		18/30
		60.00%
	BEP(units) = total fixed cost/contribution margin per unit
		270000/18
		15000
	BEP(dollars) =		270000/60%
		450000
	CM ratio			60%
	Break even point in units			15000
	Break even point in dollars			450000
			20300
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		609000	30	100%	609000	30	100%
	Variable expenses		304500	15	50%	243600	12	40%
	Contribution margin		304500	15	50%	365400	18	60%
	Fixed expenses		213,000			270,000
	Net operating income		91,500			95,400
c)		yes