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 (19,500 units × $30 per unit)	$	585,000
Variable expenses		409,500
Contribution margin		175,500
Fixed expenses		180,000
Net operating loss	$	(4,500	)

Required:

1. Compute the company’s CM ratio and per unit Contribution Margin
2. Compute the company’s break-even point in unit sales and dollar sales.
3. Compute the company’s required unit sales and dollar sales if they want a Target Profit of $18,000.
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 packaging costs would increase variable expenses by $1.50 PER unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $9,750?

Answer 1

1) calculation of contribution margin and contribution margin ratio:

Contribution margin per unit = selling price per unit - variable cost per unit

= $30 - $21

= $9 per unit

Note : variable cost per unit = variable cost/unit sold

= $409,500/19,500 = $21

Contribution margin ratio = contribution margin/sales

= $9/$30

= 30%

2) calculation of break even point

Break even point in dollars = Fixed cost/contribution margin ratio

= $180,000/30%

= $600,000

Break even point in units = Fixed cost/contribution margin per unit

= $180,000/$9

= 20,000 units

3) calculation of required sales:

Sales in dollars =( Fixed cost + required profit)/contribution margin ratio

= ($180,000 + $18,000)/30%

= $660,000

Sales in units = (Fixed cost + required profit)/contribution margin per unit

= ($180,000 + $18,000)/$9

= 22,000 units

4) calculation of unit sold if the variable cost is increases by $1.5 per unit

New variable cost = $21 + $1.5

= $22.5

New contribution margin per unit = selling price per unit - variable cost per unit

= $30 - $22.5

= $7.5 per unit

Required sales in units

= (Fixed cost + required profit)/contribution margin per unit

= ($180,000 + $9,750)/$7.5

= 25,300 units