Markline Company - Basic CVP Analysis; Cost Structure

Basic CVP Analysis; Cost Structure (L03, L04, L05, L06).

Due to erratic sales of its sole product - a disposable pocket camera - Markline Company has been experiencing difficulty for some time. The company's income statement for the most recent month is given below:

Sales (30,000 units x $20.00 per unit) ..... $600,000
Less variable expenses ....................... 360,000
Contribution margin .......................... 240,000
Less fixed expenses ........................... 250,000
Net operating loss ............................. $ (10,000)
_________

Required:

1. Compute the company's CM ratio and its break-even point in both units and dollars.
2. The president believes that a $20,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $90,000 increase in monthly sales. If the president is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach to prepare your answer.)
3. Refer to the original data. The sales manager is convinced that a 14% reduction in the selling price, combined with an increase of $65,000 in the monthly advertising budget, will cause unit sales to increase by 100%. What will the new income statement look like if these changes are adopted?
4. Refer to the original data. The Marketing Department thinks that a redesigned package for the camera would help sales. The new package would increase packaging costs by $0.75 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,200?
5. Refer to the original data. By automating certain operations, the company could reduce variable costs by $2 per unit. However, fixed costs would increase by $65,000 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 40,000 units next month. Prepare
two income statements, one assuming that operations are not automated and
one assuming that 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? Explain.