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:

1.) The president believes that a $6,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $81,000 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.)

Increse by ?

2.)  

Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $55,000 each month.

  

Compute the new CM ratio and the new break-even point in both unit sales and dollar sales.

CM ratio 70%

Break-even point in units ???

Break-even point in dollars ???

Assume that the company expects to sell 20,900 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

Contribution Income Statement

Not Automated Automated

Total Per Unit % Total Per Unit %

Sales ??????? $40 100% ??????? $40 100%

Variable expenses ??????? $24 60% ??????? $12 30%

Contribution margin ??????? $16 40% ??????? $28 70%

Fixed expenses 232,000 ??????

Net operating income $(232,000)   

  Sales (13,000 units × $40 per unit) $ 520,000      Variable expenses 312,000      Contribution margin 208,000      Fixed expenses 232,000      Net operating loss $ (24,000)

Explanation / Answer

Answer 1 Computation of company’s monthly net operating income or loss Present Proposed Increase / (decrease) in Income by Sales $520,000.00 $601,000.00 Less : Variable Expenses (60% of sales) $312,000.00 $360,600.00 Contribution Margin $208,000.00 $240,400.00 Less : Fixed Expenses $232,000.00 $238,500.00 Net Operating Income / (loss) -$24,000.00 $1,900.00 $25,900.00 Increase in Income by $25,900 Variable expense % = $312000 / $520000 = 60% Answer 2-a Contribution ratio after automation = (Sales - Variable expense)/Sales = ($520000 - $156000)/$520000 = 70% Break even point in units = Fixed expenses / Contribution Margin per unit Contribution Margin per unit = (sales * CM ratio) / No.of units sold = ($520000*70%)/13000 units = $28 per unit Break even point in units = [$232000 + $55000]/$28 = 10250 units Break even point in dollars = Break even point in units * selling price per unit = 10250 units * $40 = $4,10,000 Answer 2-b Contribution Income statement Not Automated Automated Total Per unit % Total Per unit % Sales $836,000.00 $40.00 100% $836,000.00 $40.00 100% Less : Variable Expenses $501,600.00 $24.00 60% $250,800.00 $12.00 30% Contribution Margin $334,400.00 $16.00 40% $585,200.00 $28.00 70% Less : Fixed Expenses $232,000.00 $287,000.00 Net operating Income $102,400.00 $298,200.00

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