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 (13,100 units at $20 per unit) $262,000
Variable expenses 131,000

Contribution margin 131,000
Fixed expenses 146,000
Net operating loss $(15,000)


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Refer to the original data. By automating certain operations, the company could reduce variable expenses in half. However, fixed costs would increase by $118,000 each month.


(a) Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round Break-even point in units to the nearest whole number. Round Break-even point in dollars to the nearest dollar amount. Omit the "%" and "$" signs in your response.)


CM ratio %
Break-even point in units units
Break-even point in dollars $

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(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.) (Input all amounts as positive values. Round your per unit cost to 1 decimal place and all other answers to the nearest dollar, percentage values. Omit the "$" and "%" signs in your response.)


Not Automated Automated
Total Per Unit % Total Per Unit %
Sales (20,300 units) $ $ $ $
Variable expenses






Contribution margin $

$


Fixed expenses
Net operating income $
$


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Explanation / Answer

Contribution Income Statement Sales(13,100 units at $20 per unit) $262,000 Variable Expenses 65,500 Contribution margin 196,500 Fixed Costs 264,000 Net Operating Loss 67,500 a. compute the new Contribution Margin Contribution Margin Ratio= Contribution Margin/Sales 196,500/262,000 0.75 75% Break-even point(in units)= Fixed expenses/Unit contribution 264,000/(Sales-V.C) 264,000/(20-5) 264.000/15 17,600 Variable cost= 65,500/13,100=5 Break-even Point(in dollars) Fixed expenses/CM Ratio 264,000/0.75 352,000 b.Contribution format Income Statement Details 13,100 units Per Unit 20,300 units Per Unit Sales $262,000 $20 406,000 $20 Variable Expenses 131,000 10 203,000 10 Contribution Margin 131,000 10 203,000 10 Fixed Expenses 146,000 146,000 Net Operating Income(Loss) -15,000 57,000

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