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 given below: Sales (13,200 units $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 396,000 198,000 198,000 220,500 $ (22,500)

Answer 1

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PEM Inc.
Calculation of Variable expense per unit	Amount $	Note
Variable expenses	198,000.00	A
Units sold	13,200.00	B
Variable expense per unit	15.00	C=A/B
Answer 1	Amount $
Sales	396,000.00	D
Contribution margin	198,000.00	E
CM ratio	50.00%	F=E/D
Units sold	13,200.00	See B
Contribution margin per unit	15.00	G=E/B
Fixed expense	220,500.00	H
Break even units	14,700.00	I=H/G
Sell price	30.00	J
Break even $	441,000.00	K=I*J
Answer 2
Increase in sales	84,000.00	L
CM ratio	50.00%	See F
Increase in Contribution margin	42,000.00	M=L*F
Less: Advertising expense	6,100.00
Increase in net operating income	35,900.00
Answer 3
Current Sell price	30.00	See J
Reduction by 10%	3.00	N=J*10%
Revised Sell price	27.00	O=J-N
Current Sales units	13,200.00	See B
Increase by 100%	13,200.00	P=B*100%
Revised Sales units	26,400.00	Q=B+P
Income statement	Amount $
Sell Price	27.00	See O
Less: Variable expenses	15.00	See C
Contribution per unit	12.00	R
Units sold	26,400.00	See Q
Contribution margin	316,800.00	S=R*Q
Less: Fixed expense	220,500.00
Less: Advertising expense	31,000.00
Operating Income	65,300.00
Answer 4
Current Contribution per unit	15.00
Less: packaging costs	0.50
Revised Contribution per unit	14.50	T
Target Profit	4,200.00
Add: Fixed expense	220,500.00
Target Contribution	224,700.00	U
Revised Contribution per unit	14.50	See T
Units to be sold	15,497.00	V=U/T
Workings for Answer 5
Current Variable cost per unit	15.00
Reduction by	3.00
Revised Variable cost per unit	12.00	W
Current Fixed costs	220,500.00
Increase by	55,000.00
Revised Fixed costs	275,500.00	X
Answer 5 a	Amount $	Note
Sell price	30.00	See J
Less: Variable expenses	12.00	See W
Contribution margin per unit	18.00	Y
CM ratio	60.00%	Z=Y/J
Fixed expense	275,500.00	See X
Break even units	15,306.00	AA=X/Y
Break even $	459,180.00	AB=AA*J

Answer 5 b	Not Automated	Automated	Note
Sell Price	30.00	30.00	See J
Less: Variable expenses	15.00	12.00	See C, W
Contribution per unit	15.00	18.00	AC
Units sold	20,000.00	20,000.00	AD
Contribution margin	300,000.00	360,000.00	AE=AC*AD
Less: Fixed expense	220,500.00	275,500.00	See H, X
Operating Income	79,500.00	84,500.00
Increase in Operating Income by		5,000.00

Answer 5 c

If automation is done then operating income will increase by $ 5,000 so yes the company should automate its operations.