Due to erratic sales of its sole product - a high-capacity battery for laptop computers - PEN, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (19,500 units x $30 per unit) $585,000 Variable expenses 409,500 Contribution margin $175,500 Fixed expenses 180,000 Net operating loss <$4,500> Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month. a) Compute the new CM ratio and the new break-even point in unit sales and dollar sales. b) Assume the the company expects to sell 26,000 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? Explain.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Due to erratic sales of its sole product - a high-capacity battery for laptop computers - PEN, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below:
| Sales (19,500 units x $30 per unit) | $585,000 |
| Variable expenses | 409,500 |
| Contribution margin | $175,500 |
| Fixed expenses | 180,000 |
| Net operating loss | <$4,500> |
- Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month.
a) Compute the new CM ratio and the new break-even point in unit sales and dollar sales.
b) Assume the the company expects to sell 26,000 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? Explain.
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