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 $ 260,000 Variable expenses 156,000 Contribution margin 104,000 Fixed expenses 116,000 Net operating loss $ Required:
1. Compute the company's CM ratio and its break-even point in both units and dollars. CM ratio % Break-even point in units Break-even point in dollars $.
2. The sales manager feels that an $7,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $67,000 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? Increase or Decrease in net operating loss/net operating income ?
3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $30,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? Contribution Income Statement Sales ? Variable Expenses ? Contribution Margin ? Fixed Expenses ? Net Operating Income Loss ?
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 $0.40 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, the company could slash its variable expenses in half. However, fixed costs would increase by $115,000 per month.
a. Compute the new CM ratio and the new break-even point in both units and dollars. CM ratio % Break-even point in units Break-even point in dollars $
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.Not Automated Automated Total Per Unit % Total Per Unit % Sales Variable Expenses Contribution Margin Fixed Expenses Net Operating Income Loss