Question & Answer: Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has bee…..

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Sales (13,000 units × $40 per unit)

520,000

Variable expenses

260,000

Contribution margin

260,000

Fixed expenses

290,000

Net operating loss

(30,000)

Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by $0.80 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,000? (Do not round intermediate calculations and round your final answer to the nearest whole number.)

5.	Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $57,000 each month.

a.	Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Round your final answers to the nearest whole number.)

Expert Answer

Answer to 4

Per Unit Variable Cost = Total Variable Cost / Total Units

= 260000/13000

= 20 per unit

Revised Variable Cost = 20 + 0.80 = 20.80

Revised Contribution = 40 – 20.80 = 19.20

Sale to achive desired profit = (Fixed Cost+ Desired Profit) / Contribution

= (290000+4000) / 19.20

= 15313 Units

Answer to 5

Particulars	Amt
Sales (13,000 units × $40 per unit)	520000
Variable expenses	130000

Contribution margin	390000
Fixed expenses	347000

Net operating lncome	43000

Answer to 6

New CM Ratio = Contribution / Sales

= 390000 / 520000

= 75%

Break Even in Units = Fixed Cost / Contribution Per Unit

= 347000 / (390000/13000)

= 11567 Units

Break Even in $ Sales = Fixed Cost / CM Ratio

= 347000 / 75%

= 462667

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