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 (13,200 units × $20 per unit) $ 264,000 Variable expenses 158,400 Contribution margin 105,600 Fixed expenses 117,600 Net operating loss $ (12,000 ) 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 $6,400 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? 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $37,000 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 0.80 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? 5. 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. 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 21,000 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.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 21,000)?

Answer 1

The break-even point is:

Profit	= Unit CM × Q ? Fixed expenses
$0	= ($20 ? $12) × Q ? $117600
$0	= ($8) × Q ? $117600
$8Q	= $117600
Q	= $117600 ÷ $8
Q	= 14700 units

14,700 units × $20 per unit = $294,000 in sales 2:- Incremental contribution margin:     $85,000 increased sales × 40% CM ratio $ 34,000      Less increased advertising cost 6,400    Increase in monthly net operating income $27,600 Since the company is now showing a loss of $12,000 per month, if the changes are adopted, the loss will turn into a profit of $14,300 each month ($27,600 less $12,000 = $15,600). 3:- Sales: (26,400 units @ $18.00 per unit*) = $475,200 Variable expenses: (26400 units @ $12 per unit) = $316,800 Fixed expenses: ($117,600 + $37,000) = $154,600 *$20.00 - ($20.00 × 0.10) = $18.00 sales $475,200 less variable $316,800 Contribution Margin $ 158,400 Less Fixed Cost $ 154,600 Net Operating Income $ 3,800 4:- Profit = Unit CM × Q ? Fixed expenses $4,500 = ($20.00 ? $12.80*) × Q ? $117,600 $4,500 = ($7.20) × Q ? $117,600 $7.20Q = $117600+$4500 Q = $122,100 ÷ $7.20 Q = 16959 units *$12.00 + $0.80 = $12.80. 5:- A:-New Cm Ratio Perr Unit Persent of sales Sales 20 100% Variable cost 12-3=9 45% CM 20-9=11 55% break Even point in units=Fixed Cost CM Unit = $117,600+$53000 11 =170,600/11 =15509 Unit Sales toBreak Even Dollars:-Fixed Expenses/CM Ratio =$170,600/.55 =$ 310,182 C:- Contribution Income Satement Not Automated Automated Total Per unit % Total Per unit % Sales $ 420,000 20 100% $ 420,000 20 100% Variable Cost $252000 12 60% $189,000 9 45% Cm $168000 8 40% $231,000 11 55% Fixes cost $117,600 5.6 28% $170,600 8.12 41% Net operating income $50,400 2.4 12% $60,400 2.88 14% D:- Yes