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    Basics of CVP analysis: Cost Structure

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    Sales(19,500 units x30 per unit) 585,000
    less variable expenses 409,500
    contribution margin 175,500
    less fixed expenses 180,000
    net operating loss (4,500)

    1. Compute the company's CM ratio and its break-even points in both units and dollars
    2. The president believes that a 16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an 80,000 increase in monthly sales. if the president is right, what will be the effect on the company's net operating income or loss?(use the incremental approach in preparing the answer)
    3. referring to original data, the sales manager is convinced that a 10% reduction in the selling price combined with an increase of 60,000 in the monthly budget will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted.
    4. referring to original data, the marketing department thinks that a fancy new package for the laptop battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of 9,750?
    5. referring to original data, by automating certain operations, the company could reduce variable costs by 3 per unit. However fixed costs would increase by 72,000 each 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 26,000 units next month. prepare two contribution format income statements, one assuming that operations are not automated and one assuming they are.(show data on a per unit and percentage basis as well as in total for each alternative.
    c. would you recommend that the company automate its operations?

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    Solution Preview

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

    INCOME STATEMENT OLD SCENARIO
    TOTAL Units Per Unit
    SALES 585000 19500 30
    LESS VARIABLE EXPENSES 409500 21
    CONTRIBUTION MARGIN 175500 9
    LESS FIXED EXPENSES 180000
    NET OPERATING INCOME -4500
    Contribution Margin ratio= 0.3

    BREAK EVEN POINT (Sales IN value)= 600000 FIXED COSTS/ CM RATIO

    BREAK EVEN POINT (Sales IN Units)= 20000 units

    2. The president bekieves that a 16,000 increase in the monthly advertising budget, cobined with an intensified effort by the sales staff, will result in an 80,000 increase in monthly sales.
    if the president is right, what will be the effect on the company's net operating income or loss?(use the incremental approach in preparing the answer)

    INCOME STATEMENT- Incremental Approach
    TOTAL
    Incremental Sales 80000
    CONTRIBUTION MARGIN 24000 (Contribution Margin Ratio * ...

    Solution Summary

    This solution answers 5 CVP analysis questions, addressing CM ratio, contribution formats and break-even points.

    $2.19

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