Problem 5-20

I'd like help with the following problem, but please explain how you arrive at your answers. Thank you.

Problem 5-20 Basics of CVP Analysis; Cost Structure [LO1, LO3, LO4, LO5, LO6] Memofax, Inc., produces memory enhancement kits for fax machines. 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 (12,900 units at $40 per unit) $ 516,000 Variable expenses 309,600 Contribution margin 206,400 Fixed expenses 230,400 Net operating loss $ (24,000)

Required: 1. Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.) CM ratio % Break-even point in units Break-even point in dollars $

(Sorry, I forgot to include the rest of the problem in my initial post. Here it is:)

2. The sales manager feels that an $6,600 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $87,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)

Net Operating Income is: $_____________________

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $36,000 in the monthly advertising budget, will double unit sales.

What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values except losses which should be indicated by minus sign. Omit the "$" sign in your response.)

4.

Refer to the original data. The companys advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,800? (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Sales Units: = _________________

5.	Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $116,000 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 your final answers to the nearest whole number. Omit the "%" and "$" signs in your response.)

CM Ratio ____________%

Break-even point in units ____________

Break-even point in dollars $____________

b. Assume that the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Omit the "$" and "%" signs in your response.)

		Not Automated			Automated
	Total	Per Unit	%	Total	Per Unit	%
Sales
Variable Expenses
Contribution Margin
Fixed Expenses
Net Operating Income (Loss)

Expert Answer

It is given in the question that contribution = 206400 and sales = 516000

a) Contribution Margin ratio = (Contribution Margin/Sales)*100 = (206400/516000)*100 = 40%

b) Break-even point in units

Break even point is a point where company is in a position of no profit no loss.

So, At Breakeven point Contribution=Fixed Cost

It is clear from the question that selling price is $40 , so contribution per unit is 40% of $40 i.e 40*0.4 = 16

So for generating 230400 contribution , company have to sell =230400/16 = 14400 Units

c) As clear from point b that break even point in Units is 14400 units , so break even point in $ will be 14400*40= $576000

Thank you!