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:

Required:

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 $87,000 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.)

        

  

  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. What will the new contribution format income statement look like if these changes are adopted?

        

  

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by $0.60 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,300? (Do not round intermediate calculations and round your final answer to the nearest whole number.)  

        

  

  5. Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $58,000 each month.

  

a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Round your final answers to the nearest whole number.)

           

b. Assume that the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

           

c. Would you recommend that the company automate its operations?

         

Sales (13,100 units × $20 per unit)	$	262,000
Variable expenses		157,200
Contribution margin		104,800
Fixed expenses		116,800
Net operating loss	$	(12,000)

Solution

Answer 2. Statement of Incremental Profit If Increase in Monthly Advertsing budget Incremental Revenue Increase in Contribution - 4,350 Units X $8             34,800.00 Incremental Costs Fixed Advertising Expenses               6,700.00 Net Increase (decrease) in Operating Profits             28,100.00 Contribution per Unit = $104,800 (Total Contribution) / 13,100 Units (No. of Units Sold) Contribution per Unit = $8 per unit Increase in sale in Units = $87,000 (Increase in sales) / $20 (SP per unit) Increase in sale in Units = 4,350 Units Answer 3. Contribution Format Income Statement Sales - 26,200 Units X $18        471,600.00 Variable Costs - 26,200 Units X $12        314,400.00 Contribution        157,200.00 Fixed Exepenses          116,800.00 Advertising Expenses             32,000.00        148,800.00 Net Operating Income             8,400.00 Answer 4. BEP (In Units + Target Profit) = (Fixed Cost + Target Profit) / Contribution Margin per Unit Contribution Margin Per Unit = $20 - ($12 + $0.60) Contribution Margin Per Unit = $7.40 per unit BEP (In Units + Target Profit) = ($116,800 + $4,300) / $7.40 BEP (In Units + Target Profit) = $121,100 / $7.40 BEP (In Units + Target Profit) = 16,364.86 or say 16,365 Units (Approx.) Answer 5-a. Contribution margin Per Unit = $20 - $6 (Variable Cost) Contribution margin Per Unit = $14 per Unit Contribution Margin Ratio = Contribution / Sales Contribution Margin Ratio = $14 / $20 Contribution Margin Ratio = 70% Fixed Costs = $116,800 + $58,000 = $174,800 BEP (In Units) = Fixed Cost / Contribution Margin per Unit BEP (In Units) = $174,800 / $14 BEP (In Units) = 12,485.71 units or say $12,486 Units (Approx.) BEP (In $) = Fixed Cost / Contribution Margin Ratio BEP (In $) = $174,800 / 70% BEP (In $) = $249,714.29 or say $249,714 (approx.) Answer 5-b. Contribution Format Income Statement Operations Not Automated Automated Sales in Units             20,800.00           20,800.00 Sales          416,000.00        416,000.00 Less: Variable Costs          249,600.00        124,800.00 Contribution Margin          166,400.00        291,200.00 Fixed Expenses          116,800.00        174,800.00 Net Operating Profit             49,600.00        116,400.00 Answer 5-c. Yes