Assignment Print View
1.
11/16/15, 10:13 PM
Award: 10.00 points
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)
Variable expenses
Contribution margin
Fixed expenses
$ 270,000
162,000
108,000
120,000
Net operating loss
$ (12,000)
Required:
1. Compute the company’s CM ratio and its break-even point in both units and dollars. (Omit the "%" and
"$" signs in your response.)
CM ratio
Break-even point in units
Break-even point in dollars
40 %
15,000
300,000
$
2. The sales manager feels that an $6,400 increase in the monthly advertising budget, combined with an
intensified effort by the sales staff, will result in a $88,000 increase in monthly sales. If the sales
manager is right, what will the revised net operating income or loss? (Use the incremental approach in
preparing your answer.) (Omit the "$" sign in your response.)
Net operating income
is
$
16,800
3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined
with an increase of $31,000 in the monthly advertising budget, will double unit sales. What will the new
contribution format income statement look like if these changes are adopted? (Input all amounts as
positive values except losses which should be indicated by minus sign. Omit the "$" sign in your
response.)
Sales
Contribution Income Statement
$
486,000
Variable expenses
324,000
Contribution margin
162,000
Fixed expenses
151,000
$
Net operating income (loss)
11,000
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 $0.50 per unit. Assuming
no other changes, how many units would have to be sold each month to earn a profit of $4,100? (Round
your intermediate calculations to 2 decimal places and final answer to the nearest whole
number.)
Sales units
16,547
5. Refer to the original data. By automating, the company could slash its variable expenses in half.
However, fixed costs would increase by $121,000 per month.
a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round
intermediate calculations. Round your final answers to the nearest whole number. Omit the
"%" and "$" signs in your response.)
CM ratio
Break-even point in units
Break-even point in dollars
$
70 %
17,215
344,286
b. Assume that the company expects to sell 20,100 units next month. Prepare two contribution format
income statements, one assuming that operations are not automated and one assuming that they
are. (Omit the "$" and "%" signs in your response.)
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Page 1 of 3
Assignment Print View
11/16/15, 10:13 PM
Total
402,000
Not Automated
Per Unit
$
20
Variable expenses
240,000
12
Contribution margin
162,000
8
Fixed expenses
120,000
Sales
Net operating income (loss)
$
$
Total
402,000
Automated
Per Unit
$
20
60
120,600
6
30
40
281,400
14
70
%
100
$
$
%
100
241,000
$
$
40,400
rev: 11_22_2011
References
Worksheet
Difficulty: Easy
Learning Objective: 05-04 Show
the effects on net operating
income of changes in variable
costs, fixed costs, selling price,
and volume.
Learning Objective: 05-01
Explain how changes in
activity affect
contribution margin and
net operating income.
2.
Learning Objective: 05-03 Use the
contribution margin ratio (CM
ratio) to compute changes in
contribution margin and net
operating income resulting from
changes in sales volume.
Learning Objective: 05-06 Determine the break-even point.
Learning Objective: 05-05
Determine the level of sales
needed to achieve a desired target
profit.
Award: 10.00 points
Frieden Company’s contribution format income statement for the most recent month is given below:
Sales (46,000 units)
Variable expenses
$966,000
676,200
Contribution margin
Fixed expenses
289,800
231,840
Net operating income
$ 57,960
The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy.
Thus, profits vary considerably from year to year according to general economic conditions. The company
has a large amount of unused capacity and is studying ways of improving profits.
Required:
1. New equipment has come on the market that would allow Frieden Company to automate a portion of its
operations. Variable expenses would be reduced by $6.30 per unit. However, fixed expenses would
increase to a total of $521,640 each month. Prepare two contribution format income statements, one
showing present operations and one showing how operations would appear if the new equipment is
purchased. (Input all amounts as positive values except losses which should be indicated by
minus sign. Round your "Per unit" answers to 2 decimal places. Omit the "$" and "%" signs in
your response.)
Sales
$
Amount
966,000
Present
Per Unit
$
676,200
Variable expenses
Contribution margin
289,800
Fixed expenses
21
14.7
Proposed
Per Unit
$
21
70
386,400
8.4
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$
57,960
6.3
30 %
580,200
100 %
$
231,840
Net operating income (loss)
$
Amount
966,600
%
$
12.6
%
100 %
40
60 %
521,640
$
58,560
Page 2 of 3
Assignment Print View
11/16/15, 10:13 PM
2. Refer to the income statements in (1) above. For both present operations and the proposed new
operations, Compute:
a. The degree of operating leverage.
Present
Degree of operating leverage
Proposed
10
5
b. The break-even point in dollars. (Omit the "$" sign in your response.)
Break-even point in dollars
Present
772,800
$
$
Proposed
869,400
c. The margin of safety in both dollar and percentage terms. (Omit the "$" and "%" signs in your
response.)
Margin of safety in dollars
Margin of safety in percentage
$
Present
193,800
20 %
$
Proposed
97,200
10 %
3. Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in
deciding whether to purchase the new equipment? (Assume that ample funds are available to make the
purchase.)
Performance of peers in the industry
Cyclical movements in the economy
Stock level maintained
Reserves and surplus of the company
4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the
company’s marketing strategy should be changed. Instead of paying sales commissions, which are
included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries
and that the company invest heavily in advertising. The marketing manager claims that this new
approach would increase unit sales by 50% without any change in selling price; the company’s new
monthly fixed expenses would be $289,800; and its net operating income would increase by 25%.
Compute the break-even point in dollar sales for the company under the new marketing strategy. (Omit
the "$" sign in your response.)
New break even point in dollar sales
$
References
Worksheet
Learning Objective: 05-04 Show
the effects on net operating
income of changes in variable
costs, fixed costs, selling price,
and volume.
Difficulty: Medium
Learning Objective: 05-06
Determine the break-even point.
Learning Objective: 05-01
Explain how changes in
activity affect
contribution margin and
net operating income.
Learning Objective: 05-07
Compute the margin of safety and
explain its significance.
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Learning Objective: 05-08 Compute the degree of operating leverage
at a particular level of sales and explain how it can be used to predict
changes in net operating income.
Page 3 of 3
