Due to erratic sales of its sole product-a high-capacity battery for laptop comp
ID: 2330041 • Letter: D
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 (12,600 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 252,000 126, 000 126,000 141,000 $ (15,000) 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 $82,000 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 grovw 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 $4,200? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 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 20,700 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 20,700)?Explanation / Answer
(1) CM ratio = (Contribution / Sales) * 100
= (126000/252000) * 100 = 50%
BEP (in units) = Fixed cost / Contribution per unit
Contribution per unit = $126000/12600 units = $10 per unit
= $141000/10 = 14100 units
BEP (in $) = Fixed cost / CM ratio
= $141000/50% = $282000
(2)
Increase in Contribution ($82000 * 50%)
41000
(-) Increase in advertising cost
6900
Increase/(Decrease) in Income
34100
(3)
Sales (25200 units * $18)
453600
(-) Variable Exp (25200 units * $10)
252000
(-) Increase Advertising cost
37000
(-) Fixed cost
141000
Revised Income (Loss)
23600
(4) Target Profit = $4200
Revised Variable cost per unit = $10 + 0.60 = $10.60
Revised contribution = $4200 + $141000 (Fixed cost) = $145200
Let “X” be the units sold
(X * $20) – (X * $10.60) = $145200
$9.4X = $145200
X = 15447 units
(5) (a) CM ratio = (Contribution / Sales) * 100
SP per unit $20
Revised VC per unit = 10 – 3 = $7
Contribution= 20 – 7 = $13
CM ratio = (13/20) * 100 = 65%
(b)
Not Automated
Automated
Sales (20700 * $20)
414000
414000
(-) Variable cost
(20700 * 10)
=207000
(20700 * 7)
=144900
Contribution Margin
207000
269100
(-) Fixed cost
141000
(141000+55000)
=196000
Net operating Income (Loss)
66000
73100
(c) Yes company would required to automated operations
Increase in Contribution ($82000 * 50%)
41000
(-) Increase in advertising cost
6900
Increase/(Decrease) in Income
34100