Due to erratic sales of its sole product—a high-capacity battery for laptop com

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)
2. The president believes that a $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 increase in monthly sales. If the president 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 sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

Expert Answer

2.

Incremental Total
Sales 520000 89000 609000
Variable expenses 260000 44500 304500
Contribution margin 260000 44500 304500
Fixed expenses 290000 6800 296800
Net operating loss -30000 37700 7700

Contribution margin ratio = 260000 / 520000 = 50%

Incremental contribution = 89000 x 50% = 44500

The company’s monthly net operating income will increase by $37700 from a net loss of $30000 to a net profit of $7700.

3.

$
Sales (26000 units x $36) 936000
Variable expenses (26000 x $20) 520000
Contribution margin 416000
Fixed expenses 324000
Net operating loss 92000
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