PROBLEM 4-22 Basics of CVP Analysis; Cost Structure [LO1, L03, L04, L05, L05–6] Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing difficulty for some time. The company's contribution format income state- ment for the most recent month is given below: Sales (19,500 units X $30 per unit) Variable expenses .Contribution margin Fixed expenses $585,000 409,500 175,500 180,000
PROBLEM 4-22 Basics of CVP Analysis; Cost Structure [LO1, L03, L04, L05, L05–6] Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Inc., has been experiencing difficulty for some time. The company's contribution format income state- ment for the most recent month is given below: Sales (19,500 units X $30 per unit) Variable expenses .Contribution margin Fixed expenses $585,000 409,500 175,500 180,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![PROBLEM 4-22 Basics of CVP Analysis; Cost Structure [LO1, L03, L04, L05, L05-6]
Due to erratic sales of its sole product-a high-capacity battery for laptop computers—PEM, Inc.,
has been experiencing difficulty for some time. The company's contribution format income state-
ment for the most recent month is given below:
Sales (19,500 units X $30 per unit)
Variable expenses
.Contribution margin
Fixed expenses
Net operating loss
$585,000
409,500
175,500
180,000
$ (4,500)
Required:
2.
1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales.
The president believes that a $16,000 increase in the monthly advertising budget, combined
with an intensified effort by the sales staff, will result in an $80,000 increase in monthly
sales. If the president is right, what will be the effect on the company's monthly net operating
income or loss? (Use the incremental approach in preparing your answer.)
3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling
price, combined with an increase of $60,000 in the monthly advertising budget, will double
unit sales. What will the new contribution format income statement look like if these changes
are adopted?
Refer to the original data. The Marketing Department thinks that a fancy new package for the
laptop computer battery would help sales. The new package would increase packaging costs
by 75 cents per unit. Assuming no other changes, how many units would have to be sold each
month to earn a profit of $9,750?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F152fd672-d4a8-478e-a284-20c08400c0c0%2Fe4028da8-27f6-4b6f-afec-12e62c11af8c%2F6u1a9v3_processed.png&w=3840&q=75)
Transcribed Image Text:PROBLEM 4-22 Basics of CVP Analysis; Cost Structure [LO1, L03, L04, L05, L05-6]
Due to erratic sales of its sole product-a high-capacity battery for laptop computers—PEM, Inc.,
has been experiencing difficulty for some time. The company's contribution format income state-
ment for the most recent month is given below:
Sales (19,500 units X $30 per unit)
Variable expenses
.Contribution margin
Fixed expenses
Net operating loss
$585,000
409,500
175,500
180,000
$ (4,500)
Required:
2.
1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales.
The president believes that a $16,000 increase in the monthly advertising budget, combined
with an intensified effort by the sales staff, will result in an $80,000 increase in monthly
sales. If the president is right, what will be the effect on the company's monthly net operating
income or loss? (Use the incremental approach in preparing your answer.)
3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling
price, combined with an increase of $60,000 in the monthly advertising budget, will double
unit sales. What will the new contribution format income statement look like if these changes
are adopted?
Refer to the original data. The Marketing Department thinks that a fancy new package for the
laptop computer battery would help sales. The new package would increase packaging costs
by 75 cents per unit. Assuming no other changes, how many units would have to be sold each
month to earn a profit of $9,750?
Transcribed Image Text:5. 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 both unit sales and dollar sales.
b. Assume that the company expects to sell 26,000 units next month. Prepare two contribu
tion 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.)
Would you recommend that the company automate its operations? Explain.
C.
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