Tuesday, 31 July 2012

Memofax, Inc., produces memory enhancement kits for fax machines. Sales have been very

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 (13,500 units at $20 per unit) $ 270,000   
  Variable expenses 189,000   


  Contribution margin 81,000   
  Fixed expenses 90,000   


  Net operating loss $ (9,000)  





 
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 30 correct %  
  Break-even point in units 15,000 correct      
  Break-even point in dollars $ 300,000 correct      

 
2.
The sales manager feels that an $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is right, what will the revised net operating income or loss? (Use the incremental approach in preparing your answer.) (Omit the "$" sign in your response.)
 
  Net operating income correct is $ 4,000 correct  
 
3.
Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? (Input all amounts as positive values. Omit the "$" sign in your response.)
 
Contribution Income Statement
  Sales correct $ 486,000 correct  
  Variable expenses correct 378,000 correct  

  Contribution margin correct 108,000 correct  
  Fixed expenses correct 125,000 correct  

  Net operating income (loss) correct $ 17,000 correct  



 
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 $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,500? (Do not round intermediate calculations.)
 
  Sales units n/r incorrect  
 
5.
Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $118,000 per month.
 
a.
Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Omit the "%" and "$" signs in your response.)
 
  CM ratio 65 correct %  
  Break-even point in units 16,000 correct      
  Break-even point in dollars  $ 320,000 correct      

 
b.
Assume that the company expects to sell 20,000 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 correct $ 400,000 correct   $ 20 correct 100 correct $ 400,000 correct   $ 20 correct 100 correct  
  Variable expenses correct 280,000 correct   14 correct 70 correct 140,000 correct   7 correct 35 correct  






  Contribution margin correct 120,000 correct   $ 6 correct 30 correct 260,000 correct   $ 13 correct 65 correct  
  Fixed expenses correct 90,000 correct  



208,000 correct  





  Net operating income (loss) correct $ 30,000 correct   $ 52,000 correct