Due to erratic sales of its sole product—a high-capacity battery for laptop comp
ID: 2330256 • 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 (13,400 units × $20 per unit) $ 268,000
Variable expenses 134,000
Contribution margin 134,000
Fixed expenses 149,000
Net operating loss $ (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 $6,400 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 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 $32,000 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 0.50 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $5,000?
5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $58,000 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)?
Explanation / Answer
Req 1. CM ratio: Selling price per unit 20 Less: variable cost per unit 10 Contribution margin per unit 10 CM ratio: Contirbution/ Selling price *100 10 /20 *100 = 50% Break even units: Fixed cost 149000 Divide: CM perr unit 10 Break even units: 14900 units Break even in $ Fixed cost 149000 Divide: CM ratio 50% Break even in $ 298000 Req 2. Increase in Sales revenue 87000 CM ratio 50% Increase in Contribution margin 43500 Less: Increase in Advertisement 6400 Increase in Net Income 37100 Req 3. Revised sales units (13400*2) 26800 Revised Selling price (20-10%) 18 Revised sales revenue 482400 Less: Variable cost (26800*10) 268000 Contribution margin 214400 Less: Fixed cost 149000 Net income 65400 Req 4. Selling price 20 Less: Revised variable cost 10.5 CM per unit 9.5 Fixed cost 149000 Desired profits 5000 Target contribution 154000 Divide: CM per unit 9.5 Target salles units 16211 units Req 5. reqa. Selling price per unit 20 Less: variable cost per unit 7 CM per unit 13 CM ratio: CM /selling price *100 13 /20 *100 = 65% Break even units: Fixed cost 207000 Divide: CM per unit 13 Break even units: 15923 Break even in $ Fixed cost 207000 Divide: CM ratio 65% Break even in $ 318461.5 Req b: Contribution Margin Income Statement: Without With Automation Automation Sales revennue 420000 420000 Less: variable cost 210000 147000 Contribution margin 210000 273000 Less: Fixed cost 149000 207000 Net income 61000 66000 Reqc. Yes, the automation process is recommended.