Question

Problem 5-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO5- 1, LO5-3, LO5-4, LO5-5, LO5-6] 10 points 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 given below. eBook Sales (13,400 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 402,000 201,000 201,000 223,500 $ (22,500) Print References Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $7,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $90,000 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 $37,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 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 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,600? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $51,000 each month a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. b. Assume that the company expects to sell 20,800 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 20,800)? Complete this question by entering your answers in the tabs below.

Answer 1

	contribution margin per unit=			201000/13400
				15
1)	CM ratio = contribution/sales
		201000/15
		50.00%
	BEP(units) = total fixed cost/contribution margin per unit
		223500/15
		14900
	BEP(dollars) = 14900*30
		447000
	CM ratio			50%
	Break even point in units			14900
	Break even point in dollars			447000
2)	increase in contribution			(90000*50%)		45000
	less : increase in advertising budget					7,000
	increase in net income					38,000
	increases by		38,000
3)	units = 13400*2 =		26800 units ; selling price = 30*90%=$27
		Contribution Income statement
	Sales	(26800*27)			723600
	Variable expense		(26800*15)		402000
	Contribution margin				321600
	Fixed expenses		(223500+37000)		260,500
	Net income				61,100
4)	New contribution margin = 15-.80
			14.2
	BEP(units) = (total fixed cost+target profit)/contribution per unit
		(223500+4600)/14.2
		16063.38028
	Sales units		16,063
5)
	CM ratio = contribution/sales
		18/30
		60.00%
	BEP(units) = total fixed cost/contribution margin per unit
		(223500+51000)/18
		15250
	BEP(dollars) =		274500/60%
		457500
	CM ratio			60%
	Break even point in units			15250
	Break even point in dollars			457500
			20800
b)			Not Automated			Automated
			total	per unit	%	total	per unit	%
	Sales		624000	30	100%	624000	30	100%
	Variable expenses		312000	15	50%	249600	12	40%
	Contribution margin		312000	15	50%	374400	18	60%
	Fixed expenses		223,500			274,500
	Net operating income		88,500			99,900
c)		yes