Memofax, Inc., produces memory enhancement kits for fax machines. Sales have bee
ID: 2374645 • 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:
Compute the company's CM ratio and its break-even point in both units and dollars.
The sales manager feels that an $7,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $73,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company%u2019s monthly net operating income or loss? (Use the incremental approach in preparing your answer.) (Input the amount as a positive value.)
Refer to the original data. The president 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. 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. )
Refer to the original data. The company%u2019s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,400?(Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)
Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $124,000 per month.
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.)
Assume that the company expects to sell 20,500 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Input all amounts as positive values.)
Not Automated
Automated
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:
Explanation / Answer
Sales (13,500 units @ $20 per unit) $ 270,000
less:Variable expenses $ 189,000
CONTRIBUTION MARGIN $ 81,000
less:Fixed expenses $ 90,000
NET OPERATING LOSS $ (9,000)
REQUIRMENT NO.:1:
Contribution margin ratio = Contribution margin /Sales 30%
Break-even point in units sold = Fixed expenses/Unit contribution margin 15000
Break-even point in total sales dollars= Fixed expenses/CM ratio $ 300,000
REQUIRMENT NO.:2:
Incremental increase in sales $ 70,000
Incremental increase in contribution margin $ 21,000
less: Incremental increase in advertising expense $ 8,000
Incremental increase in net operating income $ 13,000
REQUIRMENT NO.:3:
INCOME STATEMENT
BASED ON CHANGES PROPOSED BY THE PRESIDENT
Sales in units(increase by 50%) 20250
Selling price (reduced by 10%) $ 18.00
Unit contribution margin $ 5.40
Sales $ 364,500
less:Variable expenses $ 255,150
CONTRIBUTION MARGIN $ 109,350
less:Fixed expenses $ 125,000
NET OPERATING LOSS $ (15,650)
REQUIRMENT NO.:4:
Fixed expenses $ 90,000
Selling price per unit $ 20
Variable expense per unit(present) $ 14
Increase in packaging cost per unit $ 0.60
Total variable expense $ 14.60
Contribution margin per unit $ 5.40
Target profit $ 4,500
Units sold to attain the target profit = Fixed expenses+Target Profit/Contribution margin per unit 17500 units
REQUIRMENT NO.:5:
ORIGINAL AUTOMATION Selling price per unit $ 20 $ 20
Variable expenses per unit $ 14 $ 7
CONTRIBUTION MARGIN $ 6 $ 13
Fixed expenses($90,000+$118,000) $ 208,000
a Contribution margin ratio = Contribution margin /Sales 65%
Break-even point in units sold = Fixed expenses/Unit contribution margin 16000
Break-even point in total sales dollars= Fixed expenses/CM ratio $ 320,000
b INCOME STATEMENT
NO AUTOMATION
Sales in units 20,000
Selling price per unit $ 20
Sales $ 400,000
less:Variable expenses @ $14 per unit $ 280,000
CONTRIBUTION MARGIN $ 120,000
less:Fixed Expenses $ 90,000
NET OPERATING INCOME $ 30,000
INCOME STATEMENT
AUTOMATION
Sales in units 20,000
Selling price per unit $ 20
Sales $ 400,000
less:Variable expenses @ $7 per unit $ 140,000
CONTRIBUTION MARGIN $ 260,000
less:Fixed Expenses $ 208,000
NET OPERATING INCOME $ 52,000
C The company should automate its operations since the net operating income
has increased by $22,000. And with increase in sales the income will directly
increase with the contribution margin per unit.