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 (13,300 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 266,000 159,600 106,400 118,400 $ (12,000) 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 $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $84,000 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 $31,000 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 $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,200? 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
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 (13,300 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 266,000 159,600 106,400 118,400 $ (12,000) 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 $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $84,000 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 $31,000 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 $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,200? 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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 (13,300 units x $20 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating loss
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 $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales
staff, will increase unit sales and the total sales by $84,000 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
$31,000 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 $0.60 per unit. Assuming no other changes, how many units would have
to be sold each month to attain a target profit of $4,200?
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)?
$ 266,000
159,600
106,400
118,400
$ (12,000)
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3
CM ratio
Break-even noint in unit sales
Req 4
%
Req 5A
Req 5B
Compute the company's CM ratio and its break-even point in unit sales and dollar sales. (Do not round intermediate
calculations. Round "CM ratio" to the nearest whole percentage (i.e., 0.234 should be entered as "23").
Req 5C
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