Question

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, 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 (12,500 units × $20 per unit)      $ 250,000

Variable expenses                                125,000

Contribution margin                              125,000

Fixed expenses                                   140,000

Net operating loss                              $ (15,000 )

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 $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 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 $38,000 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 0.50 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 20,000 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 20,000)?

Answer 1

Answer:

By using given data we have to compute the following conditions

Sl no	Data	Formula	Calculations	Result
1.	CM ratio	(Contribution / sales)*100%	(125000 / 250000)*100% =0.5*100=50%	50%
	BEP in units	Total fixed cost / Contribution margin per unit	140000 / 10=14000	14000
	BEP in dollars	BEP in units*20	14000*20=280000	280000
2.	Increase in Contribution	Increased monthly sales * CM ratio	87000*50%=43500	43500
	Less:Increased in advertisisng budget			6600
	Increase in Net Income	Increase in contribution-incresed by budget	43500-6600	36900
3.	units		12500*2=25000	25000
	Selling price		20*90%=18	18
	Sales	Selling price*units	18*25000=45000	450000
	Variable expenses	Units * 10	25000*10=250000	250000
	Contribution margin			200000
	Fixed expenses	Fixed expenses+monthly advertisisng budget	140000+38000=178000	178000
	Net income	Contribution margin-Fixed expenses	200000-178000=22000	22000
4.	New contribution margin		10-0.5=9.5	9.5
	BEP in units	(Total fixed cost+Target profit)/Contribution per unit	(140000+4600)/9.5=15221.0	15221.0
5.	CM ratio	Contributes / sales	13/20=65%	65%
	BEP in units	Total fixed cost / Contribution margin per unit	(140000+57000) / 13=15153.8	15153.8
	BEP in dollars		198000/65%=304615	304615

6.

	Non automated			Automated
	Total	Per unit	%	Total	Per unit	%
Sales	4000000	20	100	400000	20	100
Variable expense	240000	10	50	140000	7	35
Fixed expenses	140000			198000
Net operating income	20000			62000

7. yes, i recommeded that.