Due to erratic sales of its sole producta highcapacity batte

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 (13,100 units x $40 per unit) Variable expenses $524,000 314,400 Contribution margin Fixed expenses 209,600 233,600 Net operating loss S (24,000) 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 14,600 $ 584,000 2. The president believes that a $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $85,000 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.) Increases

Solution

Answers

A

Contribution margin

$                           209,600.00

B

No. of units

                                      13,100

C=A/B

Unit Contribution margin

$                                     16.00

D

Sales

$                           524,000.00

E=(A/D) x 100

CM Ratio

40%

F

Fixed expenses

$                           233,600.00

G = F/C

Break Even point in Units

14600

H = F/E or G x $40 sales price

Break Even point in Dollars

$                           584,000.00

A

Increase in Sales

$                             85,000.00

B

CM Ratio

40%

C=A x B

Increase in Contribution margin

$                             34,000.00

D

Increase in Fixed Cost

$                               6,100.00

E = C - D

Net Operating Income INCREASED by

$                             27,900.00

Working

For 13,100 x 2 = 26,200 units

A = ($ 40 - 10%) x 26,200

Sales revenue

$                           943,200.00

B = (314400/13100) x 26200

Variable Cost

$                           628,800.00

C = A - B

Contribution Margin

$                           314,400.00

D = 233,600 existing + $39,000

Fixed Cost

$                           272,600.00

E=C - D

Net Operating Income

$                             41,800.00

A

Existing Unit Contribution margin

$                                     16.00

B

Increased packaging cost

$                                        0.70

C=A-B

New Unit Contribution will be

$                                     15.30

D

Desired profits

$                               4,900.00

E

Fixed Cost

$                           233,600.00

F=D+E

Total contribution required to be earned to earn target profit

$                           238,500.00

G=F/C

Sales unit for earning desired profits

                                      15,588

Part ‘a’

A

Existing Sale price

$                                     40.00

B

Existing Variable cost

$                                     24.00

C= B x 50%

Variable cost after automation

$                                     12.00

D=A - C

New Unit Contribution margin

$                                     28.00

E = (D/A) x 100

CM Ratio

70%

F = 233600 + 55000

Fixed cost after automation

$                           288,600.00

G = F/D

Break Even point in Units

10307

H = F/E

Break Even point in dollars

$                                 412,286

Part ‘b’

Not Automated

Automated

Total

Per Unit

%

Total

Per Unit

%

Sales Revenue

$                           836,000.00

$                       40.00

100%

$                     836,000.00

$                40.00

100%

Variable cost

$                           501,600.00

$                       24.00

60%

$                     250,800.00

$                12.00

30%

Contribution margin

$                           334,400.00

$                       16.00

40%

$                     585,200.00

$                28.00

70%

Fixed Cost

$                           233,600.00

$                     288,600.00

Net Operating Income

$                           100,800.00

$                     296,600.00

A	Contribution margin	$                           209,600.00
B	No. of units	13,100
C=A/B	Unit Contribution margin	$                                     16.00
D	Sales	$                           524,000.00
E=(A/D) x 100	CM Ratio	40%
F	Fixed expenses	$                           233,600.00
G = F/C	Break Even point in Units	14600
H = F/E or G x $40 sales price	Break Even point in Dollars	$                           584,000.00