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 $82,000 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 $39,000 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 $0.60 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,100? (Do not round your intermediate calculations. Round your final answer to 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 $50,000 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. Do not round your intermediate calculations. Round up your final break even answers to the nearest whole number.)

  

  

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.

  

Answer 1

Answer 1.
CM Ratio = Contribution / Sales
CM Ratio = $134,000 / $268,000
CM Ratio = 50%
BEP (In Units) = Fixed Costs / Contribution per Unit
BEP (In Units) = $149,000 / $10
BEP (In Units) = 14,900 Units
BEP (In $ Sales) = Fixed Costs / Contribution Margin Ratio
BEP (In $ Sales) = $149,000 / 50%
BEP (In $ Sales) = $298,0000
Answer 2.
Incremental Revenue
Increase in Contribution margin - $82,000 X 50%	41,000.00
Incremental Cost
Increase in Monthly Advertising Expense	6,300.00
Net Incremental Profit (Loss)	34,700.00
Answer 3.
Contribution Format Income Statement
Sales - 26,800 Units X $18	482,400.00
Variable Expense - 26,800 Units X $10	268,000.00
Contribution	214,400.00
Fixed Expenses - $149,000 + $39,000	188,000.00
Net Income	26,400.00
Answer 4.
BEP (in Units + Target Profit) = (Fixed Cost + Target Profit) / Contribution Margin Per Unit
Contribution margin Per Unit = $20 - ($10 + $0.60)
Contribution margin Per Unit = $9.40
BEP (in Units + Target Profit) = ($149,000 + $4,100) / $9.40
BEP (in Units + Target Profit) = 16,287.23 or say 16,288 Units