P5-20 - I\'d like help with the following problem, but please explain how you ar

Question

P5-20 - I'd like help with the following problem, but please explain how you arrive at your answers. Thank you.

Problem 5-20 Basics of CVP Analysis; Cost Structure [LO1, LO3, LO4, LO5, LO6]
Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very
erratic, with some months showing a profit and some months showing a loss. The company's
contribution format income statement for the most recent month is given below:

Sales           (12,900 units at $40 per unit)      $ 516,000
Variable expenses                                              309,600
Contribution margin                                            206,400
Fixed expenses                                                   230,400
Net operating loss                                             $ (24,000)

Required:

1. Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.)

CM ratio %
Break-even point in units
Break-even point in dollars $

2. The sales manager feels that an $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $87,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)

Net Operating Income is:       $_____________________

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $36,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

4. Refer to the original data. The company’s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,800? (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

    Sales Units = __________________

5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $116,000 per month.

     a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round your final answers to the nearest whole number. Omit the "%" and "$" signs in your response.)

CM Ratio                          ____________%

Break-even point in units   ____________

Break-even point in dollars $____________

b. Assume that the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Omit the "$" and "%" signs in your response.)

                 Not Automated Automated Total                  Per Unit                 %   Total    Per Unit          %    Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income (Loss)

Explanation / Answer

1) CM ratio = 206400 * 100 / 516000 = 40%

Break even point (in dollars) = $230400 /40% = $576000

  Break even point (in units) = $576000 / $40 = 14400 units

2) increase in sales = $87000

less: increase in fixed expense (advertisement) = $6600

net increase in sales = $80400

Add: previour NOL = $(24000)

Net Operating Income is: $56400

3) Sales ( 25800 * 36) = $928800

Less: Variable cost = $619200 ($309600 * 2)

Contribution = $308800

Less: Fixed cost = $266400 ($230400 + $36000)

Net Operating income = $42400

4) The units sold to get profit of $4800 = 16 S - ($230400 + 0.60 S) = $4800

Units sold = 15273 units

5)

a) Selling price = $40 per unit and variable cost = $24 / 2 = $12 per unit

CM ratio = 40 -12 / 40 = 70%

New fixed costs = $346400

Break even point (in dollars) = $346400 /70% = $494858

  Break even point (in units) = $494858 / $40 = 12372 units

5)

b)

                 Not Automated Automated Total                  Per Unit                 %   Total    Per Unit          %    Sales 832000 40 832000 40 Variable Expenses 499200 24 60% 249600 12 30% Contribution Margin 332800 16 40% 582400 28 70% Fixed Expenses 230400 346400 Net Operating Income (Loss) 102400 236000

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