Due to erratic sales of its sole product—a high-capacity batteryfor laptop computers—PEM, Inc., has...

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Accounting

Due to erratic sales of its sole product—a high-capacity batteryfor laptop computers—PEM, Inc., has been experiencing difficultyfor some time. The company’s contribution format income statementfor the most recent month is given below:

  Sales (12,700 units× $20 per unit) $ 254,000
  Variableexpenses 152,400
  Contributionmargin 101,600
  Fixed expenses 113,600
  Net operatingloss $ (12,000)

Required:
1.
Compute the company’s CM ratio and its break-even point in bothunit sales and dollar sales.


2.
The president believes that a $6,400 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $84,000 increase in monthly sales.If the president is right, what will be the effect on the company’smonthly net operating income or loss? (Use the incremental approachin preparing your answer.)


3.
Refer to the original data. The sales manager is convinced thata 10% reduction in the selling price, combined with an increase of$37,000 in the monthly advertising budget, will double unit sales.What will the new contribution format income statement look like ifthese changes are adopted?


4.
Refer to the original data. The Marketing Department thinks thata fancy new package for the laptop computer battery would helpsales. The new package would increase packaging costs by $0.70cents per unit. Assuming no other changes, how many units wouldhave to be sold each month to earn a profit of $4,800? (Donot round your intermediate calculations. Round your final answerto nearest whole number.)


5.
Refer to the original data. By automating, the company couldreduce variable expenses in half. However, fixed expenses wouldincrease by $60,000 each month.

a.
Compute the new CM ratio and the new break-even point in bothunit sales and dollar sales. (Use the CM ratio to calculateyour break-even point in dollars. Do not round your intermediatecalculations. Round up your final break even answers to the nearestwhole number.)


b.
Assume that the company expects to sell 20,500 units next month.Prepare two contribution format income statements, one assumingthat operations are not automated and one assuming that theyare.

c.
Would you recommend that the company automate itsoperations?
Yes
No

Answer & Explanation Solved by verified expert

4.5 Ratings (624 Votes)

SOLUTION 1 Contribution margin per unit Selling price Variable expense 20 15240012700 20 12 8 Contribution margin ratio Contribution margin per unit Selling price 8 20 40 Breakeven point in units Fixed exepnse Contribution See Answer

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In: AccountingDue to erratic sales of its sole product—a high-capacity batteryfor laptop computers—PEM, Inc., has been...Due to erratic sales of its sole product—a high-capacity batteryfor laptop computers—PEM, Inc., has been experiencing difficultyfor some time. The company’s contribution format income statementfor the most recent month is given below: Sales (12,700 units× $20 per unit)$254,000 Variableexpenses152,400 Contributionmargin101,600 Fixed expenses113,600 Net operatingloss$(12,000) Required:1.Compute the company’s CM ratio and its break-even point in bothunit sales and dollar sales. 2.The president believes that a $6,400 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $84,000 increase in monthly sales.If the president is right, what will be the effect on the company’smonthly net operating income or loss? (Use the incremental approachin preparing your answer.) 3.Refer to the original data. The sales manager is convinced thata 10% reduction in the selling price, combined with an increase of$37,000 in the monthly advertising budget, will double unit sales.What will the new contribution format income statement look like ifthese changes are adopted? 4.Refer to the original data. The Marketing Department thinks thata fancy new package for the laptop computer battery would helpsales. The new package would increase packaging costs by $0.70cents per unit. Assuming no other changes, how many units wouldhave to be sold each month to earn a profit of $4,800? (Donot round your intermediate calculations. Round your final answerto nearest whole number.) 5.Refer to the original data. By automating, the company couldreduce variable expenses in half. However, fixed expenses wouldincrease by $60,000 each month. a.Compute the new CM ratio and the new break-even point in bothunit sales and dollar sales. (Use the CM ratio to calculateyour break-even point in dollars. Do not round your intermediatecalculations. Round up your final break even answers to the nearestwhole number.) b.Assume that the company expects to sell 20,500 units next month.Prepare two contribution format income statements, one assumingthat operations are not automated and one assuming that theyare. c.Would you recommend that the company automate itsoperations?YesNo


Sales (12,700 units× $20 per unit)	$	254,000
Variableexpenses		152,400

Contributionmargin		101,600
Fixed expenses		113,600

Net operatingloss	$	(12,000)

Required:
1.	Compute the company’s CM ratio and its break-even point in bothunit sales and dollar sales.

2.	The president believes that a $6,400 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $84,000 increase in monthly sales.If the president is right, what will be the effect on the company’smonthly net operating income or loss? (Use the incremental approachin preparing your answer.)

3.	Refer to the original data. The sales manager is convinced thata 10% reduction in the selling price, combined with an increase of$37,000 in the monthly advertising budget, will double unit sales.What will the new contribution format income statement look like ifthese changes are adopted?

a.	Compute the new CM ratio and the new break-even point in bothunit sales and dollar sales. (Use the CM ratio to calculateyour break-even point in dollars. Do not round your intermediatecalculations. Round up your final break even answers to the nearestwhole number.)

b.	Assume that the company expects to sell 20,500 units next month.Prepare two contribution format income statements, one assumingthat operations are not automated and one assuming that theyare.