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 (13,300 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $266, 000 133,000 133,000 148,000 $(15,000) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales 2. The president believes that a $6,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 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 $38,000 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 0.40 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,000? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $51,000 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 20,000 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 20,000)?

Explanation / Answer

1) CM ratio = 133,000/266000 50.00% BEP(units)   = 148000/10 14800 units BEP(dollar sales) = 14800*20 296000 2) Contribution on increased sales (88,000*50%)= 44000 less :increased advertising budget -6,500 Net operating income will increase by 37500 answer 3) Revised net operating income(loss) contribution (26,600*8) 212800 less:fixed expense (148000+38000) -186000 Revised net operating income(loss) 26800 answer 4) New contribution margin per unit 10-.40= 9.6 BEP(units)   = (fixed cost+targer profit)/contribution margin per unit                      = (148000+4000)/9.6 15833.33 Sale units 15,833 5-A) new contribution per unit = 10+3 = 13 CM ratio = 7/20= 65.00% BEP(units )            = (148000+51000)/13 15308 BEP(dollars)             = 199000/65% 306154 5-B) Contribution Income Statement Not Automated Automated total per unit % total per unit % Sales 400000 20 100% 400,000 20 100% lessVariable expense 200000 10 50% 140000 7 35% contribution marging 200,000 10 50% 260000 13 65% less fixed expense 148,000 199,000 Net operating income(loss) 52,000 61,000 5-c) yes

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