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 (13,400 units × $20 per unit) $268,000 160,800 Contribution margin Fixed expenses 107,200 119,200 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

Explanation / Answer

1)

CM Ratio = contribution /sales = $107200/ $268000 = 40%

Contribution per unit = $107200 / 13400 units = $8 per unit

Break even sales in units = Fixed cost / Contribution per unit = $119200 / $8 per unit = 14900 units

BEP in dollar = Fixed cost / CM ratio = $119200 / 0.40 = $298000

2)

3)

Variable expense per unit = $160800/13400 = $12 per unit

4)

Revised variable cost per unit = $12 + $0.60 = $12.60

Revised contribution per unit = $20 - $12.60 = $7.40

Target profit = $4500

Required number of units to be sold

= (Fixed cost + target profit) / contribution per unit

= ($119200 + $4500) / $7.40 per unit

= 16717 units.

5)

Variable expense per unit = $6 (half of $12)

selling price per unit = $20

contribution per unit = $20 - $6 = $14

CM = $14/$20 = 70%

Fixed cost = $119200+$57000 = $176200

BEP in units = 176200/14 = 12586 units

BEP in dollars = 12586 x $20 = $251720

Increase in sales $ 86,000.00 Increase in contribution (CM x incremental sale) $ 34,400.00 Less: Increase in expense for advertising $   6,500.00 Increase in net income $ 27,900.00

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