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: Sales (12,900 units × $20 per unit) Variable expenses $258,000 154,800 Contribution margin Fixed expenses 103,200 115,200 Net operating loss S (12,000) Required 1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales CM ratio Break-even point in units Break-even point in dollars 40 % 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 $82,000 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.) Increases by 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? PEM, Inc Contribution Income Statement

Explanation / Answer

1) CM ratio = contribution/sales 103,200/258,000 40.00% BEP(units) = total fixed cost/contribution margin per unit 115,200/8 14400 BEP(dollars) = 14400*20 288000 CM ratio 40% Break even point in units 14400 Break even point in dollars 288000 2) increase in contribution (82000*40%)= 32800 less : increase in advertising budget 6,900 increase in net income 25,900 increases by 25,900 3) units = 12900*2 = 25800 units ; selling price = 20*90%=$18 Contribution Income statement Sales (25800*18) 464400 Variable expense (25800*12) 309600 Contribution margin 154800 Fixed expenses (115200+35000) 150,200 Net income 4,600 4) New contribution margin = 8-.40 7.6 BEP(units) = (total fixed cost+target profit)/contribution per unit (115200+4700)/7.6 15776.32 Sales units 15,776 5) CM ratio = contribution/sales 14/20 70.00% BEP(units) = total fixed cost/contribution margin per unit (115200+54000)/14 12086 BEP(dollars) = 169200/70% 241714 CM ratio 70% Break even point in units 12086 Break even point in dollars 241714 b) Not Automated Automated total per unit % total per unit % Sales 402000 20 100% 402000 20 100% Variable expenses 241200 12 60% 120600 6 70% Contribution margin 160800 8 40% 281400 14 30% Fixed expenses 115,200 169,200 Net operating income 45,600 112,200 c) yes

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