Due to erratic sales of its sole product—a high-capacity battery for laptop comp

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 (13,400 units × $20 per unit) $ 268,000 Variable expenses 134,000 Contribution margin 134,000 Fixed expenses 149,000 Net operating loss $ (15,000) Required: 1. Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales.

2. The president believes that a $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $86,000 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 $0.50 cents 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 and round your final answer to the nearest whole number.)

5. Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $59,000 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.) b. Assume that the company expects to sell 20,500 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

Explanation / Answer

contribution margin per unit= 134000/13400 10 1) CM ratio = contribution/sales 134,000/268,000 50.00% BEP(units) = total fixed cost/contribution margin per unit 149000/10 14900 BEP(dollars) = 14900*20 298000 CM ratio 50% Break even point in units 14900 Break even point in dollars 298000 2) increase in contribution (86000*50%) 43000 less : increase in advertising budget 6,300 increase in net income 36,700 increases by 36,700 3) units = 13400*2 = 26800 units ; selling price = 20*90%=$18 Contribution Income statement Sales (26800*18) 482400 Variable expense (26800*10) 268000 Contribution margin 214400 Fixed expenses (149000+35000) 184,000 Net income 30,400 4) New contribution margin = 10-.50 9.5 BEP(units) = (total fixed cost+target profit)/contribution per unit (149000+4700)/9.5 16178.95 Sales units 16,179 5) CM ratio = contribution/sales 15/20 75.00% BEP(units) = total fixed cost/contribution margin per unit (149000+59000)/15 13867 BEP(dollars) = 208000/75% 277333 CM ratio 75% Break even point in units 13867 Break even point in dollars 277333 20500 units b) Not Automated Automated total per unit % total per unit % Sales 410000 20 100% 410000 20 100% Variable expenses 205000 10 50% 102500 15 25% Contribution margin 205000 10 50% 307500 5 75% Fixed expenses 174,000 208,000 Net operating income 31,000 99,500 c) yes

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