| 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) | ||||
|
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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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