Homework SourseMemofax Inc produces memory enhancement software for compute
Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company’s contribution format income statement for the most recent month is given below:
Compute the company’s CM ratio and its break-even point in both units and dollars.
The sales manager feels that an $10,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $80,000 increase in monthly sales. If the sales manager 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.)
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $46,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?
Refer to the original data. The company’s advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.5 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $6,500? (Do not round intermediate calculations.)
Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $92,800 per month.
Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round \"Contribution Margin Ratio\" to 2 decimal places.)
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. (Do not round intermediate calculations. Round \"Per Unit\" and \"Percentage\" to 2 decimal places.)
| Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company’s contribution format income statement for the most recent month is given below: |
Solution
1 CM ratio=Contribution margin/Sales=100000/250000=0.40 Break-even point in units=Fixed cost/Contribution margin per unit Contribution margin per unit=100000/12500=$8 per unit Break-even point in units=106000/8=13250 units Break-even point in $=Fixed cost/CM ratio=106000/0.40=$265000 2 Increase in sales 80000 Increase in contribution margin (80000*0.40) 32000 Less: Increase in fixed expense 10000 Increase in net operating income 22000 3 Contribution format income statement $ Sales (25000 units at $18 per unit) 450000 Less: Variable expenses 270000 (450000*0.60) Contribution margin 180000 Less: Fixed expenses (106000+46000) 152000 Net operating income 28,000 4 Prepare a contribution format income statement by assuming that number of units sold=x Contribution format income statement $ Sales (x units at $20 per unit) 20x Less: Variable expenses 12.5x (20x*0.60)+0.5x Contribution margin 7.5x Less: Fixed expenses 106000 Net operating income 7.5x-106000 Target profit=$6500 7.5x-106000=6500 7.5x=112500 x=15000 units Units to be sold=15000 units 5 Contribution format income statement $ Sales (25000 units at $18 per unit) 450000 Less: Variable expenses 135000 (450000*0.30) Contribution margin 315000 Less: Fixed expenses (106000+92800) 198800 Net operating income 1,16,200 a. CM ratio=Contribution margin/Sales=315000/450000=0.70 Break-even point in units=Fixed cost/Contribution margin per unit Contribution margin per unit=315000/12500=$25.2 per unit Break-even point in units=198800/25.2=7889 units Break-even point in $=Fixed cost/CM ratio=198800/0.70=$284000 b. Contribution format income statement Not Automated Automated Sales (20000 units at $20 per unit) 400000 400000 Less: Variable expenses 240000 120000 (400000*0.60) (400000*0.30) Contribution margin 160000 280000 Less: Fixed expenses 106000 198800 (106000+92800) Net operating income 54,000 81,200
