Reference no: EM133032408

Question - Sound Systems Co. manufactures high quality speakers for desktop and laptop computers. Last month, Sound Systems Co suffered a loss of P18,000. The income statement for the last month is as follows:

Sound Systems Co. Sales (13,500 units x P40) P540,000

Less Variable expenses (13,500 units x P28) 378,000

Contribution margin P162,000

Less fixed expenses (180,000)

Net operating loss P(18,000)

Required - Compute the break-even point in units and in pesos and the contribution margin ratio of Sound Systems Co.

The sales department feels that if monthly advertising budget is increased by P16,000, the sales will be increased by 3,500 units. Show the effect of these changes assuming the price remains unchanged.

If sales price is reduced by 20% and monthly advertising expenses are increased by P70,000, the unit sales are expected to increase by 100%. Show the effect of this change by preparing a new income statement for Sound Systems Co.

Sound Systems Co wants to make the packing of its product more attractive. The new packing would increase by P1.20 per unit. Assuming no other changes, compute the number of units to be sold to earn a net operating income of P9,000.

The company is planning to purchase a new machine. The installation of new machine will increase fixed cost by P236,000 and decrease unit variable expenses by 50%.

(a) Compute the CM ratio and break-even point in units and in pesos if the new machine is installed.

(b) Company expects a sale of 20,000 units for the next month. Prepare two income statements, one assuming that the machine is not installed and one assuming that it is installed.

(c) Should the company install the new machine. Give your recommendation.