Problem 5-20 Basics of CVP Analysis; Cost Structure [LO1, LO3, LO4, LO5, LO6] Me
ID: 2364945 • Letter: P
Question
Problem 5-20 Basics of CVP Analysis; Cost Structure [LO1, LO3, LO4, LO5, LO6] 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 $20 per unit) $ 270,000 Variable expenses 189,000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Contribution margin 81,000 Fixed expenses 90,000 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Net operating loss $ (9,000) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.) (Click to select)Net operating incomeNet operating loss is $ 3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values. Omit the "$" sign in your response.) Contribution Income Statement (Click to select)Fixed expensesContribution marginSalesVariable expensesNet operating income (loss) $ (Click to select)Fixed expensesSalesNet operating income (loss)Variable expensesContribution margin -------------------------------------------------------------------------------- (Click to select)Fixed expensesNet operating income (loss)Variable expensesSalesContribution margin (Click to select)Net operating income (loss)SalesContribution marginVariable expensesFixed expenses -------------------------------------------------------------------------------- (Click to select)Contribution marginSalesFixed expensesNet operating income (loss)Variable expenses $ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 4. Refer to the original data. The companyExplanation / Answer
REQUIREMENT NO.:2:
Break-even point in total sales dollars= Fixed expenses/CM ratio
Fixed expenses
$ 180,000
CM ratio
60%
Break-even point in total sales dollars
$ 300,000
REQUIREMENT NO.:3:
Increase in sales
$ 45,000
less:Variable cost($45,000/$15)*$6
$ 18,000
Increase in net operating income
$ 27,000
REQUIREMENT NO.:4:
Sales
$ 360,000
less:Variable expenses
$ 144,000
Contribution Margin
$ 216,000
Fixed expenses
$ 180,000
Net Operating Income
$ 36,000
Degree of Operating Leverage= Contribution Margin/Net Income
6
Increase in sales @15%
$ 54,000
Increase in variable expenses @15%
$ 21,600
INCREASE IN NET OPERATING INCOME
$ 32,400
REQUIREMENT NO.:5:
INCOME STATEMENT
BASED ON RESULTS OF LAST YEAR OPERATIONS
Sales in units
28,000
Selling price per unit
$ 15
Sales
$ 420,000
less:Variable expenses @ $6 per unit
$ 168,000
CONTRIBUTION MARGIN
$ 252,000
less:Fixed Expenses
$ 180,000
NET OPERATING INCOME
$ 72,000
INCOME STATEMENT
BASED ON CHANGES PROPOSED BY THE SALES MANAGER
Sales in units(increase by 50%)
42000
Selling price (reduced by 10%)
$ 13.50
Decrease in Unit contribution margin
$ 7.50
REQUIREMENT NO.:2:
Break-even point in total sales dollars= Fixed expenses/CM ratio
Fixed expenses
$ 180,000
CM ratio
60%
Break-even point in total sales dollars
$ 300,000
REQUIREMENT NO.:3:
Increase in sales
$ 45,000
less:Variable cost($45,000/$15)*$6
$ 18,000
Increase in net operating income
$ 27,000
REQUIREMENT NO.:4:
Sales
$ 360,000
less:Variable expenses
$ 144,000
Contribution Margin
$ 216,000
Fixed expenses
$ 180,000
Net Operating Income
$ 36,000
Degree of Operating Leverage= Contribution Margin/Net Income
6
Increase in sales @15%
$ 54,000
Increase in variable expenses @15%
$ 21,600
INCREASE IN NET OPERATING INCOME
$ 32,400
REQUIREMENT NO.:5:
INCOME STATEMENT
BASED ON RESULTS OF LAST YEAR OPERATIONS
Sales in units
28,000
Selling price per unit
$ 15
Sales
$ 420,000
less:Variable expenses @ $6 per unit
$ 168,000
CONTRIBUTION MARGIN
$ 252,000
less:Fixed Expenses
$ 180,000
NET OPERATING INCOME
$ 72,000
INCOME STATEMENT
BASED ON CHANGES PROPOSED BY THE SALES MANAGER
Sales in units(increase by 50%)
42000
Selling price (reduced by 10%)
$ 13.50
Decrease in Unit contribution margin
$ 7.50