Island Novelties, Inc., of Palau makes two products-Hawalian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows: Hawaiian Tahitian Joy Fantasy Selling price per unit Variable expense per unit Number of units sold annually $ 20 140 9 35 6,000 18,000 Fixed expenses total $710,700 per year Required 1 Assuming the sales mix given above, do the following a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage 2. The company has developed a new product called Samoan Delight that sells for $60 each and that has variable expenses of $48 per unit. If the company can sell 15,000 units of Samoan Delight without incurring any additional fixed expenses a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change b. Compute the company's revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, 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 (12,800 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 256,000 153,600 102,400 114,400 (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 $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $83,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the companys 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 0.80 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,700? 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 21,000 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 (Assuming that the company expects to sell 21,000)
