Purchase Solution

PEM, Inc: Basics of CVP Analysis; Cost Structure

Not what you're looking for?

Ask Custom Question

PEM, Inc. income statement

Sales (19500 X $30 per unit)......$585,000
Less Variable Expenses............ 409,500
Contribution margin............... 175,500
Less: Fixed Expenses.............. 180,000
Net operating loss................ $(4,500)

1. The president believes that a $16,000 increase in the monthly advertising budget will result in an $80,000 increase in monthly sales. If the president is right, what will be the effect on the company's monthly net operating income or loss?

2. Sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?

3. The Marketing Dept. thinks that a new package for the laptop computer 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?

4. 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 ration 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 contributions format 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.

Purchase this Solution

Solution Summary

This post explains concepts of basic cost volume and profit analysis and how cost structure can be managed.

Solution Preview

1. Contribution margin ratio = 175500/585000=0.30
Contribution margin from additional sales = 80000*0.30=24000
Expenditure on advertising = 16000
Effect on net operating income = 24000-16000=8000
New net operating income will be =-4500+8000=3500

2. Sales (39000 X $27 per unit)...... $1,053,000
Less Variable Expenses (39000*$21)........... $819,000
Contribution margin............... 234,000
Less: Fixed Expenses.............. 240,000 (we will add 60000 advertising expenses to the earleir fixed cost)
Net operating ...

Purchase this Solution


Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Introduction to Finance

This quiz test introductory finance topics.

Operations Management

This quiz tests a student's knowledge about Operations Management