Homework SourseDue 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 financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:
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 $6,700 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 $4,300?
5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 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 20,400 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.)
| Sales (13,200 units × $30 per unit) | $ | 396,000 | |
| Variable expenses | 198,000 | ||
| Contribution margin | 198,000 | ||
| Fixed expenses | 220,500 | ||
| Net operating loss | $ | (22,500 | ) |
Solution
(1) CM Ratio :-
Contribution margin/Sales
= 198000/396000 = 50%
BEP(in units) = Fixed cost/contribution pu
Fixed cost = 220500
Contribution pu = 198000/13200 units = 15
BEP = 220500/15 = 14700 units
BEP(in $) = Fixed cost/% of contribution
= 220500/50% = $ 441000
(2) Increase in monthly net operating income:-
Increase Sale = $80000
Contribution increase = 80000 * 50% = 40000
Advertising cost = 6700
Increase Net operating Income = 40000 – 6700 = $ 33300
(3)
Sale (13200 units * 2) * ($ 30 * 90%)
712800
(-)Variable Exp (15 * 26400 units)
396000
(-) Fixed Exp (220500 + 32000)
252500
Revised Net Operating Income
64300
(4) Sale – Variable cost – Fixed cost = Profit
Target Profit = 4300
Let ‘x’ be the units sold
(x * 30) – (15.80 * x) – 220500 = 4300
14.2 x = 224800
X = 15831 units
(5a) VC per unit = 15-3 = 12
FC = 220500 + 53000 = 273500
Contribution pu = 30 – 12 = 18
BEP (in units) = 273500/18 = 15194.4 or 15195 units
BEP($) = 15195 * 30 = $455850
(5b)
Not Automated
Automated
Total
Per Unit
%age
Total
Per Unit
%age
Sale
(20400 * 30)
=612000
30
100%
(20400 * 30)
=612000
30
100%
(-) Variable cost
(20400 * 15)
=306000
15
50%
(20400 * 12)
=244800
12
40%
Contribution
306000
15
50%
367200
18
60%
(-) Fixed cost
220500
273500
Nt operating Profit /(Loss)
85500
93700
(5c) Yes, company need to automated the operations
| Sale (13200 units * 2) * ($ 30 * 90%) | 712800 |
| (-)Variable Exp (15 * 26400 units) | 396000 |
| (-) Fixed Exp (220500 + 32000) | 252500 |
| Revised Net Operating Income | 64300 |
