Question

5 Check my work 4 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: 4 points Sales (12,800 units * $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 384,000 192,000 192,000 214,500 $ (22,500) eBook Print 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 $6,200 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $80,000 per month. 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 $32,000 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 $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,800? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $59,000 each month.

Answer 1

Requirement 1 Contribution Margin ratio Break even point in units Break even point in sales dollars Requirement 2 Increase in contribution marign (80000*50%) Less : Increase in advt costs Increase in net operating income $ $ $ 50% 14300 $429,000 Requirement 4 Unit sales to attain target profit = (Fixed cost + Target profit) / CM per unit (214500+4800)/14.50 40,000 6,200) 33,800 15124 Units Net Income Increase by $35,400 Note : Contribution Margin ratio 192000/384000 Note : CM per unit ; Seling Price Less : Revised variable cost Contribution margin per unit Requirement 3 Current Selling price Revised selling price = 30*90% 50% $ $ 30 27 $ $ $ 30.00 (15.50) 14.50 Break even point in units = Fixed Cost / Cm per unit 214500/15 14300 Units Sales (12800*2*27) Less : Variable Costs (12800*2*15) Contribution margin Less : Fixed costs Net Operating income $ 691,200 $ (384,000) S 307,200 $ (246,500) $ 60,700 CM per unit = 192000/12800 units $ 15 Break even point in sales dollars = Fixed Cost / Cm ratio 214500/50% 429000

Requirement 5(a) Requirement 56) Automated Contribution Margin ratio Break even point in units Break even point in sales dollars 60% 15194 $455,833 Total Contribution income Statement Not Automated Total Per Unit % 615,000 30 100% $ 307,500 15 50% $ 307,500 15 50% $ 214,500 $ 93,000 $ Sales (20500 Units) $ Variable Expenses $ Contribution margin $ Fixed costs $ Net Income Note : Selling Price Less : Revised variable cost Contribution margin per unit Per Unit % 30 100% 12 40% 18 60% 615,000 246,000 369,000 273,500 95,500 30 -12 18 Requirement 5(c.) Yes The Company should automate the operations Contribution Margin ratio 18/30 60% Break even point in units = Fixed Cost / Cm per unit (214500+59000)/18 15194 Break even point in sales dollars = Fixed Cost / Cm ratio (214500+59000)/60% 455833

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