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 financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (12,600 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss ? 252,000 126,000 126,000 141,000 $ (15,000) Requirec 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales 2. The president believes that a $7,000 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 increase (decrease) in the company's monthly net operating income? 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $32,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by 0.80 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,600? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $55,000 each month a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales. b. Assume that the company expects to sell 20,200 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.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,200)?

Explanation / Answer

Cost per unit Sales (12,600 units at $20 per unit) $252,000 $20 Variable expenses $126,000 $10 Contribution margin $126,000 $10 Fixed expenses -$141,000 Net operating loss -$15,000 Requirement 1: Compute the company's CM ratio and its break-even point in both units and dollars. CM ratio = Contribution Margin = $126,000/$252,000 50.00% Break-even point in units = Fixed Cost/Contribution margin per unit = $141,000/$10 14,100 units Break-even point in dollars = Fixed Cost/ Contribution Ratio $282,000 Requirement 2: The president believes that a $70,00 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, by how much will the company's net operating income increase or decrease? (Use the incremental approach in preparing your answer.) Increased sales (4000 units @ $20) $80,000 Variable expenses ($4000 x 10) $40,000 Contribution margin $40,000 Less: Fixed expenses (increased advertising cost -$7,000 Increase in monthly net operating income $33,000 Requirement 3: Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $32,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?(Net loss should be indicated by a minus sign. Omit the "$" sign in your response.) Sales = (12,600 x 2) x $20 x (1-10%) $453,600 Variable expenses ($12,600 x 2 )x $ 10 $252,000 Contribution margin $201,600 Fixed expenses = $141,000 + $32000 -$173,000 Net operating income $28,600 Requirement 4: 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 .80 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4600?(Round units to nearest whole unit.) New contribution Margin = Sales - (Old VC + Packaging) = ($20 - ($10 + $.80) $9.2 Sales = (Fixed cost + Desired profits)/ Contribution per unit = ($141,000+4600)/$9.20 15,826 Units Requirement 5: Refer to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase by $55,000 each month. (a) Compute the new CM ratio and the new break-even point in both units and dollars.(Round units to nearest whole unit, CM ratio to nearest whole percent. Omit the "%" and "$" signs in your response.) Cost per unit Sales (12,600 units at $20 per unit) $252,000.00 $20.00 Variable expenses $88,200.00 $7.00 Contribution margin $163,800.00 $13.00 Fixed expenses -$196,000.00 Net operating loss -$32,200.00 CM ratio = $163,800/$252,000 65.00% Break-even point in units = $196000/$13 15,077 units Break-even point in dollars $301,538.46 (b) Assume that the company expects to sell 20,200 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.)(Omit the "$" and "%" signs in your response.) Not Automated Automated Total Per Unit % Total Per Unit % Sales (20,200 units) $404,000.00 $20.00 100.00% $404,000.00 $20.00 100.00% Variable expenses $202,000.00 $10.00 50.00% $141,400.00 $7.00 35.00% Contribution margin $202,000.00 $10.00 50.00% $262,600.00 $13.00 65.00% Fixed expenses -$141,000.00 -$196,000.00 Net operating income $61,000.00 $66,600.00 c) Yes, company should automated its operations.

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