PROBLEM 5-22 CVP Applications: Contribution Margin Ratio; Break-Even Analysis; Cost Structure LO5-1, LO5-3, LO5-4, L05-5, LO5-6 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 (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: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. 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 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 $60,000 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 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $9,750? a. 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. 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 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. Problem 5-22 (60 minutes) 1. The CM ratio is 30%. Total Per Unit Percent of Sales - . Sales (19,500 units) Variable expenses..... Contribution margin The break-even point is: Profit = Unit CM XQ - Fixed expenses - in sales Q= units units x $_ per unit = $. Alternative solution (use formulas): a) BE sales in units Fixed Exp./Unit CM b) BE sales in dollars = Fixed Exp./CM ratio *** 2. Incremental contribution margin: $ __increased sales x % CM ratio..... Less increased advertising cost.. Increase in monthly net operating income Since the company is now showing a loss of $4,500 per month, if the changes are adopted, the loss will turn into per unit). per unit) 3. Sales units @ $. Variable expenses units @ $. Contribution margin ..... Fixed expenses ($ Net operating loss........ *$30.00 - $30.00 x 0.10) = $27.00 + $. 4. Profit = Unit CM XQ - Fixed expenses units + $ = $ Alternative solution (use formula): Unit sales to attain target profit = (Target Profit + Fixed Exp.)/Unit CM 5. a. The new CM ratio would be: Per Unit Percent of Sales Sales ....... Variable expenses Contribution margin...... The new BE point would be: a) BE sales in units = Fixed Exp./Unit CM b) BE sales in dollars = Fixed Exp./CM ratio b. Comparative income statements follow: Automated Not Automated Per Total Unit % Per Unit % Total Sales units) Variable exp... CM Fixed expenses.. Net operating income........... c