Due to erratic sales of its sole product—a high-capacity battery for laptop comp
ID: 2417003 • Letter: D
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:
Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales.
The president believes that a $6,400 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 $38,000 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 $0.40 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $5,000? (Do not round intermediate calculations and round your final answer to the nearest whole number.)
Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $58,000 each month.
Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Round your final answers to the nearest whole number.)
Assume that the company expects to sell 20,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.
Would you recommend that the company automate its operations?
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:
Explanation / Answer
1.
CM ratio = contribution margin / sales
Company’s CM ratio = 127,000 / 254,000 = 0.5:1 or 50%
Breakeven point in unit sales = fixed cost / contribution margin (in $)
= 142000 / (20-10) = 14200 units
Breakeven point in dollar sales = fixed cost / contribution margin (in units)
=$ 142000 / 12700 units
=$ 11.1811
2. Now sales become = 254000 + 80000 = 334000
Contribution margin = 334000 * 0.5 = 167000
Less- advertising expense = 6400
Less- fixed cost = 142000
Net profit = 18600
3.
Sales ( 254000 units * 18 per unit)
$
4572000
Variable expenses
$
2286000
Contribution margin
$
2286000
Fixed expenses
$
180000
Net operating profit
$
2106000
4
Net operating profit
$
5000
Fixed expenses
$
142000
Contribution margin
$
147000
Sales – variable cost = contribution margin
X*20 – (X*10 + X*.40%) = 147000
X = 14694
5
Sales ( 127000 units * 20 per unit)
$
254000
Variable expenses
$
63500
Contribution margin
$
181500
Fixed expenses
$
200000
Net operating profit/(loss)
$
(18500)
CM ratio = 181500/254000 = 0.715
Breakeven point = $200000 / (20 -5) =13333.33 units
Breakeven point in $ = $200000 / 127000 = 1.574803
Sales ( 254000 units * 18 per unit)
$
4572000
Variable expenses
$
2286000
Contribution margin
$
2286000
Fixed expenses
$
180000
Net operating profit
$
2106000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.