Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below: Sales (17,000 units at $24 per unit) Less: Variable expenses $408,000 306,000 Contribution margin Less: Fixed expenses 102,000 108,000 Net operating loss $ (6,000) Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. Contribution margin ratio Break-even point in units Break-even point in dollars 25 % 18,000 $ 432,000 2. The sales manager feels that an $18,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $120,000 increase in monthly sales. If the sales manager 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.) Increase in monthly net operating income 3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $37,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating loss 4. Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.5 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $2,000? (Do not round intermediate calculations.) Unit sales to attain target profit units 5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $45,000 per month. a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round "Contribution Margin Ratio" to 2 decimal places.) Contribution margin ratio Break-even point in units Break-even point in 5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $45,000 per month a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round "Contribution Margin Ratio" to 2 decimal places.) Contribution margin ratio Break-even point in units Break-even point in dollars b. Assume that the company expects to sell 25,000 units next month. Prepare two contribution format income statements: one assuming that operations are not automated, and one assuming that they are Do not round intermediate calculations. Round "Per Unit" and "Percentage" to 2 decimal places.) Comparative Income Statements Not Automated Automated Tota Per Unit Percentage To Per Unit Percentage Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net operating income
