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 (13,300 units × $30 per unit) $ 399,000 Variable expenses 239,400 Contribution margin 159,600 Fixed expenses 177,600 Net operating loss $ (18,000 ) 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 $88,000 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 $36,000 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 0.60 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 $56,000 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 20,200 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 20,200)?

Answer 1

	contribution margin per unit=			159600/13300
				12
1)	CM ratio = contribution/sales
		159600/399000
		40.00%
	BEP(units) = total fixed cost/contribution margin per unit
		177600/12
		14800
	BEP(dollars) = 14800*30
		444000
	CM ratio			40%
	Break even point in units			14800
	Break even point in dollars			444000
2)	increase in contribution			(88000*40%)		35200
	less : increase in advertising budget					6,600
	increase in net income					28,600
	increases by		28,600
3)	units = 13300*2 =		26,600 units ; selling price = 30*90%=$27
		Contribution Income statement
	Sales	(26600*30			718200
	Variable expense		)26600*18)		478800
	Contribution margin				239400
	Fixed expenses		(177,600+36000)		213,600
	Net income				25,800
4)	New contribution margin = 12-.60
			11.4
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(177600+4600)/11.4
		15982.46
	Sales units		15,982
5)
	CM ratio = contribution/sales
		15/30
		50.00%
	BEP(units) = total fixed cost/contribution margin per unit
		(177600+56000)/15
		15573
	BEP(dollars) =		233600/50%
		467200
	CM ratio			50%
	Break even point in units			15573
	Break even point in dollars			467200
			20200
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		606000	30	100%	606000	30	100%
	Variable expenses		363600	18	60%	303000	15	50%
	Contribution margin		242400	12	40%	303000	15	50%
	Fixed expenses		177,600			233,600
	Net operating income		64,800			69,400
c)		yes