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.)

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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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