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 (13,200 units at $30 per unit)	$396,000
Variable expenses	198,000
Contribution margin	198,000
Fixed expenses	220,500
Net operating loss	$(22,500)

Requirement 1:

Compute the company's CM ratio and its break-even point in both units and dollars.

CM ratio	%
Break-even point in units	units
Break-even point in dollars	$

Requirement 2:

The president believes that a $6500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $90,000 increase in monthly sales. If the president is right, by how much will the company's net operating income increase or decrease? (Use the incremental approach in preparing your answer.)

Net operating income

$

(Click to select)increasedecrease

Requirement 3:

Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?(Net loss should be indicated by a minus sign. Omit the "$" sign in your response.)

Sales	$
Variable expenses
Contribution margin
Fixed expenses
(Click to select)Net operating lossNet operating income	$

Requirement 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 80 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4500?(Round units to nearest whole unit.)

Sales

units

Requirement 5:

Refer to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase by $60,000 each month.

(a)	Compute the new CM ratio and the new break-even point in both units and dollars.(Round units to nearest whole unit, CM ratio to nearest whole percent. Omit the "%" and "$" signs in your response.)

CM ratio	%
Break-even point in units	units
Break-even point in dollars	$

(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.)(Omit the "$" and "%" signs in your response.)

	Not Automated			Automated
	Total	Per Unit	%	Total	Per Unit	%
Sales (26,000 units)	$	$		$	$
Variable expenses
Contribution margin		$			$
Fixed expenses
Net operating income	$			$

Answer 1

Solution 1:
Contribution margin	198000
/Sales units	13200
Contribution margin per unit	15
/ Sales price per unit	30
Contribution Margin ratio	50%
Fixed costs	220500
/Contribution Margin per unit	15
break-even point in units	14700
Fixed costs	220500
/Contribution Margin ratio	50%
break-even point in dollars	441000

Solution 2:
Increase in sales	90000
*Contribution Margin ratio	50%
Increase in Contribution margin	45000
Less: Increase in advertising expense	6500
Net operating income Increase by =	38500
Solution 3:
Information:
New Sale Price (existing sales price*90%)	27
New sales units (existing units* 200%)	26400
New Fixed costs (Existing cost+ 34000)	254500
Variable cost per unit	15

PEM, Inc..
Contribution Income statement
Sales (New units *New Price)	712800
Less: variable costs	396000
Contribution margin	316800
Less: New Fixed costs	254500
Net Operating income	62300

Solution 4:
Fixed costs	220500
Add: Taget Profit	4500
Total Amount to be earned	225000
/New Contribution Margin per unit (Existing - $0.80)	14.20
Sales units to earn target income	15845
Solution 5-a:
Contribution margin (existing + $3)	18
/ Sales price per unit	30
New Contribution Margin ratio	60%
New Fixed costs (Existing + 60000)	280500
/Contribution Margin per unit	18
break-even point in units	15583
Fixed costs	280500
/Contribution Margin ratio	60%
break-even point in dollars	467500

Solution 5-b:
PEM, Inc.
Contribution income statement
	Not automated	Automated
	Total	Per unit	%	Total	Per unit	%
Units	20000			20000
Sales	600000	30	100%	600000	30	100%
Variable costs	300000	15	50%	240000	12	40%
Contribution margin	300000	15	50%	360000	18	60%
Fixed costs	220500			280500
Net operating income	79500			79500