A company produces memory enhancement kits for fax machines. Sales have been ver
ID: 2502797 • Letter: A
Question
A company 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:
Compute the company's CM ratio and its break-even point in both units and dollars.
The sales manager feels that an $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $81,000 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.)
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $37,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?
Refer to the original data. The company
A company 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:
Explanation / Answer
Sales (12,600 units at $40 per unit) $504,000
Variable exp pu = Var Exp/No of units = 252000/12600 = $20 pu
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Contribution margin pu = 252,000/12600 = $20
Fixed expenses $282,000
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Net operating loss $(30,000)
1. Compute the company's CM ratio and its break-even point in both units and dollars.
CM ratio % = Total COnt/Sales = 252000/504000 = 50%
Break-even point in units = Fixed cost/ COnt pu = 282000/20 = 14100 units
Break-even point in dollars = 14100 units * SP pu
= 14100*40 = $564,000
2. The sales manager feels that an $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $81,000 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.)
Incremetal COntribution = CM Ratio* Incremental Sales
= 50%*81000 = $40500
Incremetal Fixed Cst = 6700
SO Incremental Revenue = 40500-6700 = $33,800
Earlier Loss was $30,000
S0 Now Net Op Income = 33800 - 30000 = $3800 (Profit)
3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $37,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?
New SP = $40*(1-10%) = $36
Var cost pu $20
So Cont pu = SP pu - VC pu = 36-20 =16
New Unit Sales = 2*12600 = 25200 units
New Fixed cost = $282,000 + 37000 = $319,000
Contribution Income Statement :
Sales (25200 Unit@$36) $907,200
Less Var Cost (25200@20) $504,000
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Total Contr $403,200
Less Fixed costs $319,000
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Net Income $84,200
4. Refer to the original data. The company
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