Reference no: EM131798742

QUESTION 1 - 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 (12,600 units at $40 per unit)	$504,000
Variable expenses	302,400
Contribution margin	201,600
Fixed expenses	225,600
Net operating loss	$(24,000)

Required:

1. Compute the company's CM ratio and its break-even point in both units and dollars.

2. The sales manager feels that an $7,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $73,000 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.)

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $33,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

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 $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,500?

5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $119,000 per month.

a. Compute the new CM ratio and the new break-even point in both units and dollars.

b. Assume that the company expects to sell 20,300 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

QUESTION 2 - Frieden Company's contribution format income statement for the most recent month is given below:

Sales (42,000 units)	$1,050,000
Variable expenses	735,000
Contribution margin	315,000
Fixed expenses	252,000
Net operating income	$63,000

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 $7.50 per unit. However, fixed expenses would increase to a total of $567,000 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.

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.

b. The break-even point in dollars.

c. The margin of safety in both dollar and percentage terms.

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.)

Stock level maintained

Performance of peers in the industry

Cyclical movements in the economy

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 $315,000; 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.

QUESTION 3 - Eneliko Company installs home theater systems. The company's most recent monthly contribution format income statement appears below:

	Amount	Percent of Sales
Sales	$123,000	100%
Variable expenses	49,200	40%
Contribution margin	73,800	60%
Fixed expenses	16,000
Net operating income	$57,800

Required:

1. Compute the company's degree of operating leverage.

2. Using the degree of operating leverage, estimate the impact on net operating income of a 20% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 20% increase in sales.