Memofax, Inc., produces memory enhancement kits for fax machines. Sales have bee
ID: 2630878 • 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. (Omit the "%" and "$" signs in your response.)
The sales manager feels that an $62,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $87,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values. Omit the "$" sign in your response.)
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 $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,700? (Do not round intermediate calculations.)
Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $119,000 per month.
Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Omit the "%" and "$" signs in your response.)
Assume that the company expects to sell 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Omit the "$" and "%" signs in your response.)
Not Automated
Automated
Sales (13,500 units at $20 per unit) $ 252,000 Variable expenses 126,000 Contribution margin 126,000 Fixed expenses 141,000 Net operating loss $ (15,000)Explanation / Answer
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 REQUIRMENT NO.:5: ORIGINAL Selling price per unit $ 20 Variable expenses per unit $ 14 CONTRIBUTION MARGIN $ 6 Fixed expenses($90,000+$118,000) 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 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 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.