Question

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Sales (12,600 units × $40 per unit)	$	504,000
Variable expenses		252,000
Contribution margin		252,000
Fixed expenses		282,000
Net operating loss	$	(30,000)

Required:

1. Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales.

CM ratio Break-even point in units Break-even point in dollars |

  2. The president believes that a $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 increase in monthly sales. If the president is right, what will be the effect on the company’s monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

        

  

  3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

        

  

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by $0.70 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,300? (Do not round intermediate calculations and round your final answer to the nearest whole number.)  

Sales units =

  

  5. Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $54,000 each month.

  

a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Round your final answers to the nearest whole number.)

CM Ratio %

Break-even point units

Break-even point in dollars

           

b. Assume that the company expects to sell 20,400 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

           

c. Would you recommend that the company automate its operations?

         

	Yes
	No

Answer 1

Per unit sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 40 20 20 12600 Units 504000 252000 252000 282000 -30000 (1) CM ratio, Break Even point in Units Dollars 50% 14100 564000 CM Ratio Break-Even Point in Units Break - Even Point in Dollars Formulas CM Ratio = Contribtuion Margin / Sales BEP in Units = Fixed Cost / CM per unit BEP in Dollars = Fixed cost / CM ratio

2) Increase in sales Increase in Contribution Margin (87000*50%) Increase in Fixed cost Increase in Net income 87000 43500 6100 37400 Increase By $ 37,400 Reduction in Selling Price Increase in Advertisements Sales Will be Double 10% 35000 PEM INC Contribution Margin Statement sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss 907200 504000 403200 317000 86200 Net Operating income 86200

New Package Increase the paking cost by Target Net income 0.70 4300 New Contribution Margin (20-0.70) Sales Units (282000+4300)/19.30 19.30 14834.2 Sales Units 14834 10 54000 Reduce the Varaibe cost by Fixed cost Will increase New Contibution Margin (20+10) New Fixed cost (282000+54000) 30 336000 CM Ratio Break-Even Point in Units =(336000/30) Break - Even Point in Dollars = (336000/75%) 75% 11200 448000

% Assume Company expeted to sell 20400 PEM INC Contribution Margin Statement Non Automated Automated Total Per unit Total Per unit % sales 816000 40 100% 816000 40 Variable Expenses 4080001 205 0% 204000 10 Contribution Margin 408000 20 50% 612000 30 Fixed Expense 282000 336000 Net Operating Income 126000 276000 100% 25% 75% 301 Would you Recommand for Automation YES