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 (12,900 units × S20 per unit) Variable expenses $258,000 154,800 Contribution margin Fixed expenses 103,200 115,200 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 2. The president believes that a $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 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.)

Explanation / Answer

1. Contribution margin ratio = Contribution /sales*100

= $103,200/$258,000*100

= 40%

Break even points in units = Fixed expenses/Contribution per unit

= $115,200/($103,200/12,900)

= $115,200/ $8 per unit = $14,400

Break even point in dollars = Fixed costs/ CM ratio

= $115,200/40%

= $288,000/-

2.

Variable cost per unit =$ 154,800/12,900 units= $12 per unit

*Variable expenses = $ 347,000/0.60= $208,200

3.

Sales price per unit = $20*(1-0.10) = $18

Sales = Sales price per unit* no. Of units sold

= $18*12,900*2 times = $464,400

Variable expense = $8 per unit *12,900*2 times

= $309,600

4. Loss =

Variable cost per unit = $12 + $0.80 = $12.80 per unit

Cm ratio = ($20-$12.80)/$20*100 = 36%

Cm per unit = $20-$12.80 = $7.20

Margin of safety = (Fixed cost + profit required)/cm per unit

= ($115,200 + $4,700)/$7.20 per unit

= $119,900/$7.20 per unit

= $16,653 units (rounding off)

5.a.

CM ratio= Contribution/Sales *100

= ($258,000 - $154,800/2) /$258,000*100

= $180,600/$258,000*100

= 70%

Contribution per unit = $20 - $12/2 =$14

Break even point in units = Fixed cost/ Contribution per unit

= ($ 115,200 + $60,000)/$14 per unit

= 12514 units

Break even point in dollars = 12,514*$20

= $250,280

b.

Automated

Not Automated

C. Yes,

I would recommend the company to automate as it is more profitable.

Sales($258,000+$89,000) $347,000 Variable expenses $208,200* Contribution $138,800 Fixed expeneses($115,200+$6,700) $121,900 Profit $16,900

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