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 (13,000 units x $40 per unit) Variable expenses $ 520,000 312,000 Contribution margin Fixed expenses 208,000 232,000 Net operating loss $ (24,000) Required: 1. Compute the company\'s CM ratio and its break-even pbint in both unit sales and dollar sales CM ratio Break-even point in units Break-even point in dollars 2. The president believes that a $6,900 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 effect on the company\'s monthly net operating income or loss? (Use the incremental approach in preparing your answer.) by

Solution

1. Current CM ratio and break eevn point. Details Total Per unit Sales (13,000 units) $520,000 $40.00 Variable expenses $312,000 $24.00 Contribution Margin $208,000 $16.00 Fixed expenses $232,000 Profit / (Loss) ($24,000) CM ratio (Contribution margin / Sales) 40% Break even point (units) = Fixed expenses /CM per unit (232000/$16) 14,500 nos Break even point (dollars) = Fixed expenses / CM % = (232000/40%) $580,000 2. With a $6900 increase in monhtly advertisement budget the following will result. Increase in sales = $88,000 , that means increase of 2,200** no. of units sale. **$88000/$40 per Unit= 2200 Unit Item Per unit Total Sales (13,000+2200 units, i.e., 15,200 units) $40 $608,000 Variable expenses $24 $364,800 Contributuion margin $16 $243,200 Fixed expenses ($232000+6900) $238,900 Net operating income $4,300 Net operating income will increase by $28300 ($24,000 loss + $4300 profit) 3. A reduciton of 10% in selling price and an additional advertising budget of $35,000 will double the unit sales. The new selling price will be 90% of $40 = $36.00 The new sales volume(units) will be 26,000 (13,000 x 2) New net operating income is as follows Item Units Per unit Total Sales 26,000 $36.00 $936,000 Variable expenses 26,000 $24.00 $624,000 Contribution margin $12.00 $312,000 Fixed expenses($232,000+$35,000) $267,000 Net operating income $45,000 Revised net operating income = $45000 4. With a new fancy packaging the packing cost will go up by $0.70 per unit. The new variable expenses will be $24.00+$0.70 = $24.70 per unit The revised contrubition margin per unit = $40.00 - $24.70 = $15.30 The fixed expenses =$232000 (a) Target profit = $4,100 (b) Total $236100 (a+b) No.of unit sales required = $236100 / $15.30 = 15,425 units. Sales units = 15,425 5. By automation , variable expenses will go down by $12 , but fixed expenses will be up by $56,000 each month. New variable expenses per unit will be $12.00 ($24.00 - $12.00) New contribution margin will be $28.00 ($40.00 - $12.00) New fixed expenses will be $288,000 ($232,000 + $56,000) 5.(a) New CM ratio is  70% ($28/$40) New break even point in units is 10286 units ($288,000/ $28) 10285.71 New breakeven point in dollars is $411429 ($288000 / 70%) 411428.6 5. (b) Expected sales next month. = 20,400 units Net operating income without automation Details No.of units Per unit Total Sales 20,400 $40.00 $816,000 Variable expenses 20,400 $24.00 $489,600 Contribution margin $16.00 $326,400 Fixed expenses $232,000 Net operating income $94,400 Net operating income with automation Details No.of units Per unit Total Sales 20,400 $40.00 $816,000 Variable expenses 20,400 $12.00 $244,800 Contribution margin $28.00 $571,200 Fixed expenses $288,000 Net operating income $283,200 5.(c) Since automation is giving an extra income of $283200 AUTOMATION is RECOMMENDED