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 financial difficulty for some time. The company's contribution format income statement for the most recent month is given below Sales (13,ee0 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 39e,00e 234,806 156,ee0 174,089 s (18,e00) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,900 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $85,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company's monthly net operating income? 3 Refer to the original data. The sales manager 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. if the sales manager is right, what will be the revised net operating income (oss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by 0.80 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,700 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 each month. a. Compute the new CM ratio and the new break even point in unit sales and dollar sales. 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. (Show data on a per unit and percentage basis, as wel as in total, for each alternative.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,500)?

Explanation / Answer

contribution margin per unit= 156000/13000 12 1) CM ratio = contribution/sales 156,000/390,000 40.00% BEP(units) = total fixed cost/contribution margin per unit 174000/12 14500 BEP(dollars) = 14500*30 435000 CM ratio 40% Break even point in units 14500 Break even point in dollars 435000 2) increase in contribution (85000*40%) 34000 less : increase in advertising budget 6,900 increase in net income 27,100 increases by 27,100 3) units = 12500*2 = 25000 units ; selling price = 30*90%=$27 Contribution Income statement Sales (26000*27) 702000 Variable expense (26000*18) 468000 Contribution margin 234000 Fixed expenses (174000+36000) 210,000 Net income 24,000 4) New contribution margin = 12-.80 11.2 BEP(units) = (total fixed cost+target profit)/contribution per unit (174000+4700)/11.2 15955.36 Sales units 15,955 5) CM ratio = contribution/sales 15/30 50.00% BEP(units) = total fixed cost/contribution margin per unit (174000+53000)/15 15133 BEP(dollars) = 227000/50% 454000 CM ratio 50% Break even point in units 15133 Break even point in dollars 454000 20500 units b) Not Automated Automated total per unit % total per unit % Sales 615000 30 100% 615000 30 100% Variable expenses 369000 18 60% 307500 15 50% Contribution margin 246000 12 40% 307500 15 50% Fixed expenses 174,000 227,000 Net operating income 72,000 80,500 c) yes

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