due to erratic sales of its sole product-a high capacity battery for laptop comp
ID: 2547502 • Letter: D
Question
due to erratic sales of its sole product-a high capacity battery for laptop computers PROBLEM 5-22A Basics of CVP Analysis; Cost Structure [LOS-I, LOS-3, LOS-4, LOS-5, LOs-61 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 Sales (19,500 units x $30 per unit) . . . . $585,000 Contribution margin....175,500 most recent month is given below: Fixed expenses. s (4,500) Required 1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales. 2. The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 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 $60,000 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 Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750? 3. 4.Explanation / Answer
1) Contribution Margin per unit = Contribution Margin/Units sold
= $175,500/19,500 = $9 per unit
Sale Price per unit = $30 per unit
Contribution Margin Ratio = CM per unit/Sale Price per unit
= $9/$30 = 0.30 or 30%
Break Even Point in $ = Fixed Expenses/CM Ratio
= $180,000/30% = $600,000
Break Even Sales in units = Break Even Sales in $/Sale Price per unit
= $600,000/$30 per unit = 20,000 units
2) Increase in Sales = $80,000
Increase in contribution Margin = Increase in sales*CM Ratio
= $80,000*30% = $24,000
Increase in Advertising cost = $16,000
Net Increase in net Operating income = Increase in Contribution - Increase in Advertising cost
= $24,000 - $16,000 = $8,000
3) Variable expenses per unit = Existing Sale price per unit - Contribution margin per unit
= $30 per unit - $9 per unit = $21 per unit
New Contribution Format Income Statement (Amount in $)
4) Contribution Margin required = Fixed Expenses+Required Profit
= $180,000+$9,750 = $189,750
New Variable Expenses after increase = $21 per unit+$0.75 per unit = $21.75 per unit
New Contribution per unit = Sale Price per unit - New Variable Expenses per unit
= $30 - $21.75 = $8.25 per unit
Units required to be sold per month = Contribution margin required/New Contribution per unit
= $189,750/$8.25 per unit = 23,000 units
Sales (19,500 units*2)*($30*90%) 1,053,000 Less : Variable Expense (19,500 units*2)*$21 per unit (819,000) Contribution Margin 234,000 Less: Fixed Expenses ($180,000+$60,000) (240,000) Net Operating loss (6,000)Related Questions
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