Due to erratic sales of its sole product-a high-capacity battery for laptop comp
ID: 2552043 • 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 glven below Sales (13,8 units $28 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss s 26e,800 13e,888 13e,808 145,888 $ (15,8e8) Requlred 1. Compute the company's CM ratio and Its break-even point in unit sales and dollar sales. 2. The presldent belleves that a $6,700 Increase In the monthly advertising budget, combined with an Intensified effort by the sales staff, will result In an $82,000 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 $40,000 In the monthly advertising budget, will double unit sales. If the sales manager is right, what wll 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 0.80 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,900? 5. Refer to the original data. By automating, the company could reduce varlable expenses by $3 per unit. However, fixed expenses woul ld Increase by $51,000 each month. a. Compute the new CM ratio and the new break-even polnt In unit sales and dollar sales b. Assume that the company expects to sell 20,300 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 20,300)? Complete this question by entering your answers in the tabs below Req 1 Req 2 Req 3 Req 4 Req 5A Req 5B Req 5C Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $40,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? (Loss amount should be indicated with minus sign.) Revised net o income (loss)Explanation / Answer
Answer 1
Breakeven Point (in Units) = Fixed Cost / Contribution per unit = 145,000 / 10 = 14,500 units
Breakeven Point (in $ Sales) = Fixed Cost / Contribution Margin (%) = 145,000 / 50% = 290,000
Answer 2
Increase in Contribution Margin = 82,000 * 50% = 41,000
Increase in Fixed Cost = 6700
Net increase in operating income = 41,000 - 6,700 =34,300
Answer 3
Answer 4
Sales (units) to earn profit of 4,900 = Fixed Costs + Desired Profit / Contribution Margin per unit = 145,000+4,900/9.20 = 16293.48 Rounded off to 16293 units
Answer 5(a)
Revised Fixed Cost = 145,000 + 51,000 = 196,000
Breakeven Point (in Units) = Fixed Cost / Contribution per unit = 196,000 / 13 = 14,500 units = 15076.92 Rounded off to 15077 units
Breakeven Point (in $ Sales) = Fixed Cost / Contribution Margin (%) = 196,000 / 65% = 301,538
Answer 5(b)
Number of units sold = 20,300
Answer 5(c)
Since the net operating income when the operations are automated is higher by $ 9,900 (67900-58000), it is recommended that the company should automate its operations.
Selling Price per unit 20.00 Variable Cost per unit 10.00 Contribution Margin per unit 10.00 Contribution Margin (%) 50%