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 (13,100 units × $30 per unit) $ 393,000

Variable expenses 235,800

Contribution margin 157,200

Fixed expenses 175,200

Net operating loss $ (18,000 )

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 $6,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $90,000 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 $31,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

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 0.60 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,800?

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 21,000 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 well as in total, for each alternative.)

c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 21,000)?

Explanation / Answer

contribution margin per unit= 157200/13100 12 1) CM ratio = contribution/sales 157200/393000 40.00% BEP(units) = total fixed cost/contribution margin per unit 175200/12 14600 BEP(dollars) = 14600*30 438000 CM ratio 40% Break even point in units 14600 Break even point in dollars 438000 2) increase in contribution (90000*40%) 36000 less : increase in advertising budget 6,500 increase in net income 29,500 increases by 29,500 3) units = 13,100*2 = 26200 units ; selling price = 30*90%=$27 Contribution Income statement Sales (26200*27) 707400 Variable expense (26200*18) 471600 Contribution margin 235800 Fixed expenses (175200+31000)= 206,200 Net income 29,600 4) New contribution margin = 12-.60 11.4 BEP(units) = (total fixed cost+target profit)/contribution per unit (175200+4800)/11.4 15789.47 Sales units 15,789 5) CM ratio = contribution/sales 15/30 50.00% BEP(units) = total fixed cost/contribution margin per unit (175200+53000)/15 15213 BEP(dollars) = 228200/50% 456400 CM ratio 50% Break even point in units 15213 Break even point in dollars 456400 21,000 units b) Not Automated Automated total per unit % total per unit % Sales 630000 30 100% 630000 30 100% Variable expenses 378000 18 60% 315000 15 50% Contribution margin 252000 12 40% 315000 15 50% Fixed expenses 175,200 228,200 Net operating income 76,800 86,800 c) yes

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