Due to erratic sales of its sole product—a high-capacity battery for laptop comp
ID: 2418018 • Letter: D
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:
Compute the company’s:
CM ratio = 40%
break-even point in unit sales = 14,500
Break-even point in dollar sales = 580,000
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 $84,000 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.)
Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $38,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?
Sales:
Variable Expenses:
Contribution Margin
Fixed Expenses
Net Income or Loss
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 $4,100? (Do not round intermediate calculations and round your final answer to the nearest whole number.)
Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $52,000 each month.
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 in units
Break-even Point in dollars
Assume that the company expects to sell 20,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.
$
$
$
$
Would you recommend that the company automate its operations?
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:
Explanation / Answer
1.
Contribution margin ratio = contribution margin/ sales*100
= 208000 / 520000 *100
= 40%
Break even sales in units = fixed cost/ contribution margin per unit(in$)
= 232000 / 16
= 14500
Break-even point in dollar sales = fixed cost / contribution margin ratio
=232000 / 0.40
=$580000
2.
Original cost
Incremental cost
Sales (13,000 units × $40 per unit)
$
520,000
$84000
Variable expenses
312,000
50400
Contribution margin
208,000
33600
Fixed expenses
232,000
6100
Net operating income / (loss)
$
(24,000)
27500
3.
Sales (26,000 units × $36 per unit)
$ 936000
Variable expenses
561600
Contribution margin
374400
Fixed expenses
270000
Net operating income / (loss)
104400
4.
Net operating income / (loss)
4100
Fixed expenses
232000
Contribution margin
236100
Sales units = 236100/ (16-.50)
= 15232.26
5
Sales (13,000 units × $40 per unit)
$ 520000
Variable expenses
156000
Contribution margin
364000
Fixed expenses
284000
Net operating income / (loss)
80000
Contribution margin ratio = contribution margin/ sales*100
= 364000 / 520000 *100
= 70%
Break even sales in units = fixed cost/ contribution margin per unit(in$)
= 284000 / 28
= 10142.86
Break-even point in dollar sales = fixed cost / contribution margin ratio
=284000 / 0.70
=$405714
Original cost
Incremental cost
Sales (13,000 units × $40 per unit)
$
520,000
$84000
Variable expenses
312,000
50400
Contribution margin
208,000
33600
Fixed expenses
232,000
6100
Net operating income / (loss)
$
(24,000)
27500
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.