Assignment Print View1.11/16/15, 10:13 PMAward: 10.00 pointsMemofax, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, withsome months showing a profit and some months showing a loss. The company’s contribution formatincome statement for the most recent month is given below:Sales (13,500 units at $20 per unit)Variable expensesContribution marginFixed expenses$ 270,000162,000108,000120,000Net 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 ratioBreak-even point in unitsBreak-even point in dollars40 %15,000300,000$2. The sales manager feels that an $6,400 increase in the monthly advertising budget, combined with anintensified effort by the sales staff, will result in a $88,000 increase in monthly sales. If the salesmanager is right, what will the revised net operating income or loss? (Use the incremental approach inpreparing your answer.) (Omit the “$” sign in your response.)Net operating incomeis$16,8003. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combinedwith an increase of $31,000 in the monthly advertising budget, will double unit sales. What will the newcontribution format income statement look like if these changes are adopted? (Input all amounts aspositive values except losses which should be indicated by minus sign. Omit the “$” sign in yourresponse.)SalesContribution Income Statement$486,000Variable expenses324,000Contribution margin162,000Fixed expenses151,000$Net operating income (loss)11,0004. Refer to the original data. The companyâ€™s advertising agency thinks that a new package would helpsales. The new package being proposed would increase packaging costs by $0.50 per unit. Assumingno other changes, how many units would have to be sold each month to earn a profit of $4,100? (Roundyour intermediate calculations to 2 decimal places and final answer to the nearest wholenumber.)Sales units16,5475. Refer to the original data. By automating, the company could slash its variable expenses in half.However, fixed costs would increase by $121,000 per month.a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not roundintermediate calculations. Round your final answers to the nearest whole number. Omit the”%” and “$” signs in your response.)CM ratioBreak-even point in unitsBreak-even point in dollars$70 %17,215344,286b. Assume that the company expects to sell 20,100 units next month. Prepare two contribution formatincome statements, one assuming that operations are not automated and one assuming that theyare. (Omit the “$” and “%” signs in your response.)http://ezto.mheducation.com/hm.tpxPage 1 of 3Assignment Print View11/16/15, 10:13 PMTotal402,000Not AutomatedPer Unit$20Variable expenses240,00012Contribution margin162,0008Fixed expenses120,000SalesNet operating income (loss)$$Total402,000AutomatedPer Unit$2060120,60063040281,4001470%100$$%100241,000$$40,400rev: 11_22_2011ReferencesWorksheetDifficulty: EasyLearning Objective: 05-04 Showthe effects on net operatingincome of changes in variablecosts, fixed costs, selling price,and volume.Learning Objective: 05-01Explain how changes inactivity affectcontribution margin andnet operating income.2.Learning Objective: 05-03 Use thecontribution margin ratio (CMratio) to compute changes incontribution margin and netoperating income resulting fromchanges in sales volume.Learning Objective: 05-06 Determine the break-even point.Learning Objective: 05-05Determine the level of salesneeded to achieve a desired targetprofit.Award: 10.00 pointsFrieden Company’s contribution format income statement for the most recent month is given below:Sales (46,000 units)Variable expenses$966,000676,200Contribution marginFixed expenses289,800231,840Net operating income$ 57,960The 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 companyhas 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 itsoperations. Variable expenses would be reduced by $6.30 per unit. However, fixed expenses wouldincrease to a total of $521,640 each month. Prepare two contribution format income statements, oneshowing present operations and one showing how operations would appear if the new equipment ispurchased. (Input all amounts as positive values except losses which should be indicated byminus sign. Round your “Per unit” answers to 2 decimal places. Omit the “$” and “%” signs inyour response.)Sales$Amount966,000PresentPer Unit$676,200Variable expensesContribution margin289,800Fixed expenses2114.7ProposedPer Unit$2170386,4008.4http://ezto.mheducation.com/hm.tpx$57,9606.330 %580,200100 %$231,840Net operating income (loss)$Amount966,600%$12.6%100 %4060 %521,640$58,560Page 2 of 3Assignment Print View11/16/15, 10:13 PM2. Refer to the income statements in (1) above. For both present operations and the proposed newoperations, Compute:a. The degree of operating leverage.PresentDegree of operating leverageProposed105b. The break-even point in dollars. (Omit the “$” sign in your response.)Break-even point in dollarsPresent772,800$$Proposed869,400c. The margin of safety in both dollar and percentage terms. (Omit the “$” and “%” signs in yourresponse.)Margin of safety in dollarsMargin of safety in percentage$Present193,80020 %$Proposed97,20010 %3. Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind indeciding whether to purchase the new equipment? (Assume that ample funds are available to make thepurchase.)Performance of peers in the industryCyclical movements in the economyStock level maintainedReserves and surplus of the company4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that thecompanyâ€™s marketing strategy should be changed. Instead of paying sales commissions, which areincluded in variable expenses, the marketing manager suggests that salespersons be paid fixed salariesand that the company invest heavily in advertising. The marketing manager claims that this newapproach would increase unit sales by 50% without any change in selling price; the companyâ€™s newmonthly fixed expenses would be $289,800; and its net operating income would increase by 25%.Compute the break-even point in dollar sales for the company under the new marketing strategy. (Omitthe “$” sign in your response.)New break even point in dollar sales$ReferencesWorksheetLearning Objective: 05-04 Showthe effects on net operatingincome of changes in variablecosts, fixed costs, selling price,and volume.Difficulty: MediumLearning Objective: 05-06Determine the break-even point.Learning Objective: 05-01Explain how changes inactivity affectcontribution margin andnet operating income.Learning Objective: 05-07Compute the margin of safety andexplain its significance.http://ezto.mheducation.com/hm.tpxLearning Objective: 05-08 Compute the degree of operating leverageat a particular level of sales and explain how it can be used to predictchanges in net operating income.Page 3 of 3
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