Reference no: EM132561167

Kunju, Inc., produces a single product. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company's income statement for the most recent month is given below:

Sales (20,000 units) Br. 100,000

Variable expenses 60,000

Contribution margin Br. 40,000

Fixed expenses 50,000

Net loss Br. (10,000)

The following situations refer to the preceding data and are independent unless otherwise told to the contrary. Ignore income taxes.

Instructions:

Question a. Compute the company's breakeven point (BEP) in units and in total sales birr

Question b. If the variable expenses per unit increase as a percentage of the selling price, will it result in a higher or a lower break-even point? Why? Assume the fixed expenses remain unchanged.

Question c. If the sales managers receives a bonus of Br. 1.00 for each unit sold in excess of the BEP, how many units must be sold each month to earn a return of 25% on the monthly investment in fixed costs?

Question d. The president is convinced that a 5% reduction in the selling price, combined with an increase of Br. 15,000 in the monthly advertising budget, will cause unit sales to double. What will be the new income if the changes are adopte?

Question e. Refer to the original data. The president feels that it would be unwise to change the selling price. Instead, he wants to increase the sales commission by Br. 0.50 per unit. He thinks that this action, combined with some increase in advertising, would cause annual sale to double. By how much could advertising be increased to earn a monthly Br. 6,000 net income?

Question f. Refer to the original data. By automating certain operations, the company could reduce its variable expenses in half. However, fixed costs would increase by Br. 20,000 per month.

i. Compute the new contribution margin ratio and the new break-even point in units and birrs.

ii. Assume that the company expects to sell 25,000 units next month, would you recommend that the company automate its operation? Explain