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

 

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  is

$ 4,000

 

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	$ 486,000
Variable expenses	378,000
Contribution margin	108,000
Fixed expenses	125,000
Net operating income (loss)	$ 17,000

 

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

 

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  %
Break-even point in units	16,000
Break-even point in dollars	$ 320,000

 

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	$ 400,000	$ 20	100	$ 400,000	$ 20	100
Variable expenses	280,000	14	70	140,000	7	35
Contribution margin	120,000	$ 6	30	260,000	$ 13	65
Fixed expenses	90,000			208,000
Net operating income (loss)	$ 30,000			$ 52,000