P5–20 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.
Break-even:
15,000 units
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
be the effect on the company’s monthly net operating income or loss? (Use the
incremental approach in preparing your answer.)
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?
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?
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.
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.
c. Would
you recommend that the company automate its operations? Explain.
TUTORIAL
PREVIEW
|
Contribution
margin ratio:
|
Total
|
Per
Unit
|
Percent
of Sales
|
|
Sales
|
$ 270,000
|
$
20
|
100%
|
|
Variable
expenses
|
189,000
|
14
|
70%
|
|
Contribution
margin
|
$
81,000
|
$ 6
|
30%
|
|
|
Correct!
|
Correct!
|
Correct!
|
File name: P5-20 memofax inc.xls File type: doc PRICE: $9
