PEM, Incorporated, is experiencing financial difficulty due to erratic sales of its only product, a high-capacity battery for laptop computers. The company's contribution format income statement for the most recent month is given below: Sales (12,900 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 387,000 193,500 193,500 216,000 $ (22,500) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes a $7,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $88,000 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 $34,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?
PEM, Incorporated, is experiencing financial difficulty due to erratic sales of its only product, a high-capacity battery for laptop computers. The company's contribution format income statement for the most recent month is given below: Sales (12,900 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 387,000 193,500 193,500 216,000 $ (22,500) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes a $7,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $88,000 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 $34,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
A-2
Transcribed Image Text:PEM, Incorporated, is experiencing financial difficulty due to erratic sales of its only product, a high-capacity battery for laptop
computers. The company's contribution format income statement for the most recent month is given below:
Sales (12,900 units × $30 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating loss
$ 387,000
193,500
193,500
216,000
$ (22,500)
Required:
1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales.
2. The president believes a $7,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff,
will increase unit sales and the total sales by $88,000 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
$34,000 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 variable 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 $4,000?
5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses
would increase by $54,000 each month.
a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales.
b. Assume the company expects to sell 20,600 units next month. Prepare two contribution format income statements, one
assuming operations are not automated and one assuming they are. (Show data on a per-unit and percentage basis, as well as in
total, for each alternative.)
c. Would you recommend the company automate its operations (Assuming that the company expects to sell 20,600 units)?
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