Memofax, Inc produces memory enhancement software for computers. Sales have been
ID: 2510653 • Letter: M
Question
Memofax, Inc produces memory enhancement software for computers. 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 (19,000 units at S40 per unit) S760,000 Less: Variable expenses 570,000 Contribution margin 190,000 Less: Fixed expenses 200,000 Net operating loss S(10,000) Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. Contribution margin ratio Break-even point in units Break-even point in dollars 96 2. The sales manager feels that an $22,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $140,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.) 3. Refer to the original data. The president is convinced that a 10% reduction in the selling price combined with an increase of $41,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? SalesExplanation / Answer
req 1: CM ratio: Contribution/ Sales *100 = 190,000 /760,000 *100 = 25% Contribution margin per unit: 190,000 /19000 = 10 per unit Break even in units: Fixed cost / CM per unit = 200,000 /10 = 20,000 units Break even in $: Fixed cost / CM ratio *100 = 200,000 /25% = $ 800,000 Req 2: Increase sales: $ 140,000 Additional contribution (140,000 *25%): 35,000 Lless: Increassed Advertisemeent cost 22,000 Net increase in profit 13,000 Req3 Sales (38000 units @ 36) 1,368,000 Less: variable cost (38000 units @30) 1,140,000 Contribution 228,000 Less: fixed cost (200,000+41000) 241,000 Net Income -13,000 Req 4; Revised Contribution per unit: 10-0.50 = 9.50 per unit Desired profit: $ 4250 Desired contribution: 4250+200,000 = 204250 Target sales in unitts: Desired contribution/ Contribution per unit $ 204,250 / 9.50 = 21500 units Req 5: Revised varaible ccost: 15 Reviced Contribution: 40-15 = 25 per unit CM ratio = 25/40 *100 = 62.50% Revised Ffixed cost: 287500 Break even in unit: Revised FC / CM per unit = 287500 /25 = 11500 units Break even in $ = Reviced FC / CM ratio = 287500/62.50% = $460,000 Req 5-b: Contribution margin Income Statement Non Automated Automated Total Per Unit % Total Per Unit % Sales 1000000 40 100% 1000000 40 100% Less: variable cost 750000 30 75% 375000 15 37.50% Contribution margin 250000 10 25% 625000 25 62.50% Less: fixed cost 200,000 287500 Net income 50000 337500