Due to erratic sales of its sole product-a high-capacity battery for laptop comp
ID: 2341069 • Letter: D
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 x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 262,000 157,200 104,800 116,800 12,000) 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 $84,000 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 0.80 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,300? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $59,000 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 20,300 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 20,300)?Explanation / Answer
Selling price = $20 per unit
Number of units sold = 13,100
Variable expenses = $157,200
Variable expenses per unit = 157,200/13,100
= $12
Contribution margin = Selling price per unit - Variable expenses per unit
= 20 - 12
= $8 per unit
Fixed expenses = $116,800
1.
Contribution margin ratio = Contribution margin/Selling price
= 8/20
= 40%
Break even point (units) = Fixed expenses/Contribution margin
= 116,800/8
= 14,600
Break even point (Dollars) = Fixed expenses/Contribution margin ratio
= 116,800/40%
= $292,000
2.
Advertisement budget is increased by $6,500
Hence, fixed expenses = 116,800 + 6,500
= $123,300
Increase in sales = $84,000
Hence, sales will become = 262,000 + 84,000
= $346,000
Operating profit = (Sales x Contribution margin ratio) - Fixed expenses
= (346,000 x 40%) - 123,300
= 138,400 - 123,300
= $15,100
Hence, company's operating income will increase by $27,100 ($12,000 loss recovered and $15,100 earned)
3.
Reduction in selling price = 10%
Increase in sales volume = 13,100 units
Increase in fixed expenses = $31,000
Hence, selling price per unit = 20 x 90%
= $18
Sales units = 13,100 + 13,100
= 26,200
Sales = 26,200 x 18
= $471,600
Fixed expenses = 116,800 + 31,000
= $147,800
Contribution margin = Selling price per unit - Variable expenses per unit
= 18 - 12
= $6 per unit
Contribution margin ratio = Contribution margin/Selling price per unit
= 6/18
= 1/3
Operating profit = (Sales x Contribution margin ratio) - Fixed expenses
= (471,600 x 1/3) - 147,800
= 157,200 - 147,800
= $9,400
4.
Increase in packaging cost = $0.80 per unit
Variable expenses per unit = 12 + 0.80
= $12.80
Contribution margin = Selling price per unit - Variable expenses per unit
= 20 - 12.80
= $7.20 per unit
Target profiit = $4,300
Number of units to be sold to get a target profit = (Fixed expenses + Target profit)/Contribution margin
= (116,800 + 4,300)/7.20
= 121,100/7.20
= 16,820
Hence, 16,820 units must be sold to get a target profit of $4,300
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