Question

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—TECH, 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 (12,700 units × $30 per unit)	$	381,000
Variable expenses		190,500
Contribution margin		190,500
Fixed expenses		213,000
Net operating loss	$	(22,500	)

1.) The president believes that a $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $85,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income?

2. 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.) Assume that the company expects to sell 20,300 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

	contribution margin ratio =190,500/381000
			0.5
1)	Hence increase in net operating income will be
	85000*50%
	contribution margin			42500
	less increase in advertising			-6,100
	increase in net income			36400	Answer
2)		contribution income statement
			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		609000	30	100%	609000	30	100%
	Variable expenses		304500	15	50%	243600	12	40%
	contribution margin		304500	15	50%	365400	18	60%
	Fixed expenses		213,000			270,000
	net operating income		91,500			95,400