value: 3.00 points Problem 5-22A Basics of CVP Analysis; Cost Structure [LO5-1,
ID: 2538789 • Letter: V
Question
value: 3.00 points Problem 5-22A Basics of CVP Analysis; Cost Structure [LO5-1, LO5-3, L05-4, LO5-5, LO5-6 Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing dificulty for some time. The company's contribution format income statement for the most recent month is given below Sales (12,700 units Variable expenses 20 per unit) $254,000 127,000 Contribution margin Fixed expenses 127,000 142,000 Net operating loss $ (15,000) Required: . 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 2. The president believes that a $6,700 Increase in the monthly advertising budget, combined with an t on the company's mondly net operating income or loss? (Use the inMensified effort by the sales staff. will result in an $82,000 increase in monthily sales. If the president is right what will e the oflect incremental approach in preparing your answer ) 24 S Clo 314 needs $50 O-74445 RefendExplanation / Answer
Ans.
( 1 ) Contribution Margin ratio = Contribution Margin / Sales
= 127000 / 254000
= 50 %
Braek Even Pt in Dollars = Fixed Cost / CM Ratio
= $142000 / 50 %
= $ 284000
Braek Even Pt in Units = Fixed Cost / CM per unit : Cm per Unit= CM / No. of units
= $ 142000 / $ 10 = 127000 / 12700
= 14200 units = $ 10 / unit
( 2 ) Incremental Effect
Increase in sales 82000 Increase in Sales units=
less: Increase in Variable Expenses ( 4100units * $ 10) 41000 sales value/ sale Price
Contribution Margin 41000 $ 82000/ 20 = 4100 units
less : Increase in Fixed Expenses 6700
Increase in Net Operating income 34300
Therefore the companies monthly net operating income after president decision is $ 19300 i.e $ 34300 - $15000
( 3 ) Income statement
Sales value [ (12700*2) * (20- 20*10%)] 457200
Variable expenses (25400 * 10) 254000
contribution Margin 203200
Fixed Expenses ( 142000+32000) 174000
Net Operating Income 29200
( 4 )
Desired Profit = Contribution Margin - Fixed Expenses
Contribution Margin = Desired Profit + Fixed Expenses
= 4700 + 142000
= 146700
CM per unit = sale value per unit - variable exp per unit
= 20 - 10.6 ( $ 10 + $ 0.6 cents)
= 9.4
No. of units to be sold = Desired contribution / contribution per unit
= 146700 / 9.4
= 15606 units
( 5 )
( a ) Income Statement
Sales value [ 12700 * 20] 254000
Variable expenses (12700 * 5) 63500
contribution Margin 190500
Fixed Expenses ( 142000+51000) 193000
Net Operating Income / loss ( 2500 )
CM Ratio = Contribution Margin / Sales
= 190500 / 254000
= 75 %
Braek Even Pt in Dollars = Fixed Cost / CM Ratio
= $193000 / 75 %
= $ 257333.33
Braek Even Pt in Units = Fixed Cost / CM per unit : Cm per Unit= CM / No. of units
= $ 193000 / $ 15 = 190500 / 12700
= 12867 units = $ 15 / unit
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