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 financialdifficulty for some time. The company’s contribution format incomestatement for the most recent month is given below:

Sales (12,900 units × $30 per unit) $ 387,000
Variableexpenses 193,500
Contributionmargin 193,500
Fixedexpenses 216,000
Net operatingloss $ (22,500 )
Required:
1. Compute the company’s CM ratio and its break-even point inunit sales and dollar sales.
2. The president believes that a $6,100 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will increase unit sales and the total sales by$88,000 per month. If the president is right, what will be theincrease (decrease) in the company’s monthly net operatingincome?
3. Refer to the original data. The sales manager is convincedthat a 10% reduction in the selling price, combined with anincrease of $32,000 in the monthly advertising budget, will doubleunit sales. If the sales manager is right, what will be the revisednet operating income (loss)?
4. Refer to the original data. The Marketing Department thinksthat a fancy new package for the laptop computer battery would growsales. The new package would increase packaging costs by $0.60 perunit. Assuming no other changes, how many units would have to besold each month to attain a target profit of $4,200?
5. Refer to the original data. By automating, the company couldreduce variable expenses by $3 per unit. However, fixed expenseswould increase by $51,000 each month.
a. Compute the new CM ratio and thenew break-even point in unit sales and dollar sales.
b. Assume that the company expects tosell 20,900 units next month. Prepare two contribution formatincome statements, one assuming that operations are not automatedand one assuming that they are. (Show data on a per unit andpercentage basis, as well as in total, for each alternative.)
c. Would you recommend that thecompany automate its operations (Assuming that the company expectsto sell 20,900 units)?

Answer & Explanation Solved by verified expert

3.8 Ratings (386 Votes)

Req 1 Contribution margin per unit Contribution margin Units sold 193500 12900 15 CM ratio Contribution margin Sales 193500 387000 50 Breakeven point in units Fixed expenses Contribution margin per unit 216000 15 14400 Breakeven point in dollars Fixed expenses Contribution margin ratio 216000 50 432000 Req 2 Increase in Contribution margin Increase in sales Contribution margin ratio 88000 50 44000 Increase in See Answer

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Transcribed Image Text

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 financialdifficulty for some time. The company’s contribution format incomestatement for the most recent month is given below: Sales (12,900 units × $30 per unit)$387,000Variableexpenses193,500Contributionmargin193,500Fixedexpenses216,000Net operatingloss$(22,500)Required:1. Compute the company’s CM ratio and its break-even point inunit sales and dollar sales.2. The president believes that a $6,100 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will increase unit sales and the total sales by$88,000 per month. If the president is right, what will be theincrease (decrease) in the company’s monthly net operatingincome?3. Refer to the original data. The sales manager is convincedthat a 10% reduction in the selling price, combined with anincrease of $32,000 in the monthly advertising budget, will doubleunit sales. If the sales manager is right, what will be the revisednet operating income (loss)?4. Refer to the original data. The Marketing Department thinksthat a fancy new package for the laptop computer battery would growsales. The new package would increase packaging costs by $0.60 perunit. Assuming no other changes, how many units would have to besold each month to attain a target profit of $4,200?5. Refer to the original data. By automating, the company couldreduce variable expenses by $3 per unit. However, fixed expenseswould increase by $51,000 each month.a. Compute the new CM ratio and thenew break-even point in unit sales and dollar sales.b. Assume that the company expects tosell 20,900 units next month. Prepare two contribution formatincome statements, one assuming that operations are not automatedand one assuming that they are. (Show data on a per unit andpercentage basis, as well as in total, for each alternative.)c. Would you recommend that thecompany automate its operations (Assuming that the company expectsto sell 20,900 units)?


Sales (12,900 units × $30 per unit)	$	387,000
Variableexpenses		193,500
Contributionmargin		193,500
Fixedexpenses		216,000
Net operatingloss	$	(22,500	)