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 (12,600 units x $30 per unit) Variable expenses Contribution margin $ 378,000 226,800 151,200 169, 200 Fixed expenses Net operating loss $ (18,000) Required: 1. Compute the company's CM ratio and Its break-even point in unit sales and dollar sales. 2. The president believes that a $6,600 Increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $82,000 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 $39,000 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 $0.70 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 $53,000 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)?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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### Calculating Break-Even Points and Contribution Margin Ratio

#### Instructions:
Complete this question by entering your answers in the tabs below for each requirement listed.

#### Requirements:
- Req 1 
- Req 2 
- Req 3 
- Req 4 
- Req 5A 
- Req 5B 
- Req 5C 

#### Problem Statement:
Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 each month. Compute the new Contribution Margin (CM) ratio and the new break-even point in unit sales and dollar sales. 

- **CM Ratio Calculation:** Do not round intermediate calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23") and other answers to the nearest whole number.

#### Input Fields:
- **CM Ratio:** 
  - Given value: 50%
- **Break-even point in unit sales:**
- **Break-even point in dollar sales:**

#### Navigation Buttons:
- **Req 4**
- **Req 5B**

This exercise enhances your ability to compute and understand the impact of changes in fixed and variable costs on a company's break-even point and contribution margin ratio.
Transcribed Image Text:### Calculating Break-Even Points and Contribution Margin Ratio #### Instructions: Complete this question by entering your answers in the tabs below for each requirement listed. #### Requirements: - Req 1 - Req 2 - Req 3 - Req 4 - Req 5A - Req 5B - Req 5C #### Problem Statement: Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 each month. Compute the new Contribution Margin (CM) ratio and the new break-even point in unit sales and dollar sales. - **CM Ratio Calculation:** Do not round intermediate calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23") and other answers to the nearest whole number. #### Input Fields: - **CM Ratio:** - Given value: 50% - **Break-even point in unit sales:** - **Break-even point in dollar sales:** #### Navigation Buttons: - **Req 4** - **Req 5B** This exercise enhances your ability to compute and understand the impact of changes in fixed and variable costs on a company's break-even point and contribution margin ratio.
**PEM, Incorporated: Financial Analysis and Decision-Making**

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:

**Income Statement:**
```
Sales (12,600 units x $30 per unit) .......................... $ 378,000
Variable expenses ............................................... 226,800
Contribution margin ........................................... 151,200
Fixed expenses .................................................. 169,200
Net operating loss ........................................... $ (18,000)
```

**Required Analysis:**
1. **Compute the company’s CM ratio and its break-even point in unit sales and dollar sales.**
2. **Analyze president's advertising budget proposal:**
   - The president believes that a $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $82,000 per month. Calculate the increase (decrease) in the company’s monthly net operating income if the president's prediction is accurate.
3. **Sales manager's pricing proposal:**
   - The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. Determine the revised net operating income if the sales manager's estimate is correct.
4. **Packaging proposal by the Marketing Department:**
   - The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. However, the new package would increase packaging costs by $0.70 per unit. Calculate the extra units required to break even if the new package is to achieve a target profit of $4,400.
5. **Automating operations:**
   - Automating the company could reduce variable expenses by $3 per unit but increase fixed expenses by $53,000 each month.
     - a. **New CM ratio and break-even point:** Compute these figures.
     - b. **Future sales projection:**
       - Assuming the company expects to sell 20,900 units next month, prepare two contribution format income statements. Compare one statement with non-automated operations and one with automated operations (Show data on a per-unit and percentage basis, as well as in total for each alternative.)
     - c. **Recommendation on automation
Transcribed Image Text:**PEM, Incorporated: Financial Analysis and Decision-Making** 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: **Income Statement:** ``` Sales (12,600 units x $30 per unit) .......................... $ 378,000 Variable expenses ............................................... 226,800 Contribution margin ........................................... 151,200 Fixed expenses .................................................. 169,200 Net operating loss ........................................... $ (18,000) ``` **Required Analysis:** 1. **Compute the company’s CM ratio and its break-even point in unit sales and dollar sales.** 2. **Analyze president's advertising budget proposal:** - The president believes that a $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $82,000 per month. Calculate the increase (decrease) in the company’s monthly net operating income if the president's prediction is accurate. 3. **Sales manager's pricing proposal:** - The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. Determine the revised net operating income if the sales manager's estimate is correct. 4. **Packaging proposal by the Marketing Department:** - The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. However, the new package would increase packaging costs by $0.70 per unit. Calculate the extra units required to break even if the new package is to achieve a target profit of $4,400. 5. **Automating operations:** - Automating the company could reduce variable expenses by $3 per unit but increase fixed expenses by $53,000 each month. - a. **New CM ratio and break-even point:** Compute these figures. - b. **Future sales projection:** - Assuming the company expects to sell 20,900 units next month, prepare two contribution format income statements. Compare one statement with non-automated operations and one with automated operations (Show data on a per-unit and percentage basis, as well as in total for each alternative.) - c. **Recommendation on automation
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