Question
Tracey Incorporated has been experiencing difficulty for some time due to erratic sales of its only product. The companys contribution format income statement for the
Tracey Incorporated has been experiencing difficulty for some time due to erratic sales of its only product. The companys contribution format income statement for the most recent month is given below:
| Total | Per Unit | Percent of Sales |
Sales (19,500 units) | $585,000 |
|
|
Variable expenses | 409,500 |
|
|
Contribution margin | 175,500 |
|
|
Fixed expenses | 180,000 |
| |
Net operating loss | ($4,500) |
- Complete the table above with the per unit information and the percent of sales information.
- 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 effect on the companys monthly net operating income or loss?
- 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. What will the new contribution format income statement look like if these changes are adopted? Should the changes be adopted?
| Total | Per Unit | Percent of Sales |
Sales |
|
|
|
Variable expenses |
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|
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Contribution margin |
|
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|
Fixed expenses |
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| |
Net operating income |
|
- Refer to the original data. The Marketing Department thinks that a fancy new package for the product would help 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 earn a profit of $9,750?
- Refer to the original data. By automating, the company could reduce variable expense by $3 per unit. However, fixed expenses would increase by $72,000 each month. Assuming that the company expects to sell 26,000 units next month, prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.
NOT AUTOMATED
| Total | Per Unit | Percent of Sales |
Sales (26,000 units) |
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|
|
Variable expenses |
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Contribution margin |
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Fixed expenses |
|
| |
Net operating income |
|
AUTOMATED
| Total | Per Unit | Percent of Sales |
Sales (26,000 units) |
|
|
|
Variable expenses |
|
|
|
Contribution margin |
|
|
|
Fixed expenses |
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| |
Net operating income |
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- Computer the break-even point in both units sales and dollar sales for both the Not Automated and the Automated scenarios.
- Computer the margin of safety in units, dollars, and percentage for both the Not Automated and the Automated scenarios.
- Computer the degree of operating leverage for both the Not Automated and the Automated scenarios.
- Compute the unit sales volume at which the net operating income is the same for either metho (This would be the point of indifference and it is computed by taking the difference in the fixed expenses and dividing it by the difference in the variable expenses per unit.)
- Would you recommend that the company automate its operations? Explain.
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