Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Incorporated, has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (12,700 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss Required: $ 254,000 152,400 101,600 113,600 $ (12,000) 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $90,000 per month. 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 $36,000 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 $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 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 20,900 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.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,900 units)?
Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Incorporated, has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (12,700 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss Required: $ 254,000 152,400 101,600 113,600 $ (12,000) 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $90,000 per month. 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 $36,000 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 $0.50 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,400? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $56,000 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 20,900 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.) c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,900 units)?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Incorporated,
has been experiencing financial difficulty for some time. The company's contribution format income
statement for the most recent month is given below:
Sales (12,700 units x $20 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating loss
Required:
$ 254,000
152,400
101,600
113,600
$ (12,000)
1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales.
2. The president believes that a $6,800 increase in the monthly advertising budget, combined with an
intensified effort by the sales staff, will increase unit sales and the total sales by $90,000 per month. 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 $36,000 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 $0.50 per
unit. Assuming no other changes, how many units would have to be sold each month to attain a target
profit of $4,400?
5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit.
However, fixed expenses would increase by $56,000 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 20,900 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.)
c. Would you recommend that the company automate its operations (Assuming that the company
expects to sell 20,900 units)?
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