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 (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 unit sales and dollar sales.

2. The president believes that a $6,400 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 $32,000 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 $5,000?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $58,000 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 21,000 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 21,000)?

Answer 1

Req 1.
CM ratio:
Selling price per unit			20
Less: variable cost per unit			10
Contribution margin per unit			10
CM ratio: Contirbution/ Selling price *100
	10 /20 *100 = 50%
Break even units:
Fixed cost			149000
Divide: CM perr unit			10
Break even units:			14900	units
Break even in $
Fixed cost			149000
Divide: CM ratio			50%
Break even in $			298000
Req 2.
Increase in Sales revenue			87000
CM ratio			50%
Increase in Contribution margin			43500
Less: Increase in Advertisement			6400
Increase in Net Income			37100
Req 3.
Revised sales units (13400*2)			26800
Revised Selling price (20-10%)			18
Revised sales revenue			482400
Less: Variable cost (26800*10)			268000
Contribution margin			214400
Less: Fixed cost			149000
Net income			65400
Req 4.
Selling price			20
Less: Revised variable cost			10.5
CM per unit			9.5
Fixed cost			149000
Desired profits			5000
Target contribution			154000
Divide: CM per unit			9.5
Target salles units			16211	units
Req 5.
reqa.
Selling price per unit			20
Less: variable cost per unit			7
CM per unit			13
CM ratio: CM /selling price *100
	13 /20 *100 = 65%
Break even units:
Fixed cost			207000
Divide: CM per unit			13
Break even units:			15923
Break even in $
Fixed cost			207000
Divide: CM ratio			65%
Break even in $			318461.5
Req b: Contribution Margin Income Statement:
			Without	With
			Automation	Automation
Sales revennue			420000	420000
Less: variable cost			210000	147000
Contribution margin			210000	273000
Less: Fixed cost			149000	207000
Net income			61000	66000
Reqc.
Yes, the automation process is recommended.