Memofax, Inc., produces memory enhancement kits for fax machines. Sales have bee
ID: 2344864 • Letter: M
Question
Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below:
Sales (13,500 units at $40 per unit) $ 540,000
Variable expenses 324,000
Contribution margin 216,000
Fixed expenses 240,000
Net operating loss $ (24,000)
Required:
1.
Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.)
CM ratio ???? %
Break-even point in units ????
Break-even point in dollars $ ????
2.
The sales manager feels that an $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $89,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)
Loss or Income? ________________?????
3.
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)
4.
Refer to the original data. The company
Explanation / Answer
Required:
1.
Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.)
CM ratio = (216,000)/540,000 = 0.4 or 40%
BE point in units = 240,000/(40*.4) =15,000 units
BE point in dollars = 15,000*40 = $600,000
CM ratio 40%
Break-even point in units 15,000
Break-even point in dollars $600,000
2.
The sales manager feels that an $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $89,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)
Increase in CM – increase in cost = 89,000*.4 – 6,100 = 29,500 increase in income
29,500 + -24,000 = 5,500
Loss or Income? ________________income of 5,500
3.
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)
Sales (27,000 units at $36 per unit) $ 972,000
Variable expenses 648,000
Contribution margin 324,000
Fixed expenses 275,000
Net operating income $ 49,000
4.
Refer to the original data. The company’s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,100? (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)
Sales price = 40. Variable costs: 324,000/13,500 = $24 per unit plus 0.60 = $24.60 per unit
CM = 40 – 24.60 = $15.40
To earn a profit of 4,100: (4100+240,000)/15.40 = 15,851 units
Sales units 15,851
5.
Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $121,000 per month.
a.
Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round your final answers to the nearest whole number. Omit the "%" and "$" signs in your response.)
Variable costs = 162,000
Fixed costs = 361,000
Sales revenue = 540,000
CM = 540,000-162,000 = 378,000
CM ratio = 378,000/540,000 = 0.7 or 70%
BE point in units = 361,000/(.7*40) = 12893
BE in dollars = 12893*40 = 515,720
CM ratio 70 %
Break-even point in units 12893
Break-even point in dollars $515,720