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 (13,500 units × $30 per unit)	$	405,000
Variable expenses		243,000
Contribution margin		162,000
Fixed expenses		180,000
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 $6,900 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 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 $31,000 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 $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,000?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $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 20,200 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)?

The president believes that a $6,900 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income? (Do not round intermediate calculations.)

Answer 1

PART 1	Contribution Margin
		$
	Selling price per unit	30
	Less : variable cost per unit($243,000/13,500 units)	18
	Contribution Per unit	12
	Contribution Margin (12/30)	40%
	BREAK-EVEN POINT
		$
	Fixed Expense	180,000.00
	Contribution per unit	12
	Break-even point (In units) ($180,000/12)	15,000
	Break-even point (In Dollars) (15,000 unit x 12)	$ 180,000.00

PART 2	REVISED NET OPERATING INCOME/(LOSS)
		$
	Sales ($89,000 + 405000)	494,000.00
	Less : Variable cost (18 x 16,467)	296,400.00
	Contribution margin	197,600.00
	Less : Fixed overhead (180,000+6900)	186,900.00
	Net operating profit	10,700.00
	Old operating profit	(18,000.00)
	Increase in operating profit	28,700.00

PART 3	REVISED NET OPERATING INCOME/(LOSS)
		$
	Sales (27,000 units x $27)	729,000.00
	Less : Variable cost (18 x 27000)	486,000.00
	Contribution margin	243,000.00
	Less : Fixed overhead (180,000+31,000)	211,000.00
	Revised Net operating profit	32,000.00

PART 4	NUMBER OF UNIT TO BE SOLD
		$
	Target profit	4,000.00
	Add : fixed overhead	180,000.00
	Contribution	184,000.00
	Contribution margin per unit ($12-$.40)	$11.60
	NUMBER OF UNIT TO BE SOLD	15,862.00