Assignment

Cost-Volume-Profit Relationships

Read Chapter 4 of your text. Refer to the review problem on pages 144 - 146.

Pear Computer Corporation produces memory boards for PCs. Sales have been erratic, with some months showing a profit and some months showing a loss. The company's contribution margin income statement for January 2012 is given below.

Sales (14,000 units @ $20 per unit) $280,000
Variable expenses @ $12 per unit) 168,000
Contribution Margin 112,000
Fixed Expenses 120,000
Net operating loss $( 8,000)

Required:

1. Compute the company's contribution margin (CM) ratio and its break-even point in both units and dollars.

2. The sales manager believes that a $5,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $15,000 increase in monthly sales. If the sales manager is correct, what will be the effect on the company's monthly net operating income or loss?

3. Refer to the original data. The president is convinced that a 10% reduction in selling price, combined with an increase of $40,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?

4. Refer to 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 $5,000?

5. Refer to the original data. By automating certain operations, the company could slash its variable expenses by one-third. However, fixed costs would increase by 35% 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 why.