ezto.mheducation.com 2. Memofax, Inc, produces memory enhancement software for c

Question

ezto.mheducation.com 2. Memofax, Inc, produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution fornat income statement for the most recent month is given below Sales (18,000 units at $25 per unit) $450,000 Less: Variable expenses 270,000 Contributon margin Less: Fixed expenses 180,000 188,000 Net operating loss $ (8,000) Required: 1. Compute the company's CM ratio and its break even point in both units and dollars. Contribution margin ratio Break-even point in units Break-even point in dolars 2. The sales manager feels that an $20,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $130,000 increase in monthly sales. If the sales manager 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)

Explanation / Answer

1 Contribution margin ratio=Contribution/Sales=270000/450000=0.60 Break even point in $=Fixed cost/Contribution margin ratio=188000/0.60=313333 Break even point in units=Fixed cost/Contribution per unit Contribution per unit=180000/18000=10 Break even point in units=188000/10=18800 units 2 Increase in sales=130000 Increase in contribution=Increase in sales*CM ratio=130000*0.60=78000 Increase in profit=Increase in contribution-Increase in fixed cost=78000-20000=58000 3 Sales (18000*2*(25-10%) 810000 Less:Variable expenses (18000*2*15) 540000 Contribution margin 270000 Fixed expense (188000+85000) 273000 Net operating income -3000 4 Number of units required to achieve the desired profit=(Fixed cost+Desired profit)/Contribution per unit Contribution per unit=Sales-Variable cost=25-(15+0.50)=9.50 Number of units required to achieve the desired profit=(188000+2000)/9.50=20000 units 5 a. Contribution margin ratio=Contribution/Sales Contribution per unit=Sales-Variable cost=25-(15*0.5)=17.5 Contribution margin ratio=17.5/25=0.7 Break even point in $=Fixed cost/Contribution margin ratio Fixed cost=188000+60500=248500 Break even point in $=248500/0.7=$355000 Break even point in units=Fixed cost/Contribution per unit=248500/17.5=14200 units b. Contribution income statement Not automated Automated Total Per unit % Total Per unit % Sales (25000*25) 625000 25 100 625000 25 100 Less:Variable expenses 375000 15 60 187500 7.5 30 (25000*15) (25000*7.5) Contribution margin 250000 10 40 437500 17.5 70 Fixed expense 188000 248500 (188000+60500) Net operating income 62000 189000

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