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 (12,600 units × $30 per unit)	$	378,000
Variable expenses		226,800
Contribution margin		151,200
Fixed expenses		169,200
Net operating loss	$	(18,000	)

Required:

a) 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)?

b) 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 0.40 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,500?

c) Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 each month.

d). Compute the new CM ratio and the new break-even point in unit sales and dollar sales.

e). Assume that the company expects to sell 20,800 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.)

Answer 1