Question

Sales (19,500 units at $30 per unit) $585,000 Variable expenses 409,500 Contribution margin 175,500 Fixed expenses 180,000 Net operating loss $(4,500) By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase by $72,000 each month.Compute the new CM ratio and the new break-even point in both units and dollars.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 that they are.

Answer 1

Answer:

                                                                                                   Automated

Sales (19,500 units at $30 per unit)            $585,000            $585,000

Variable expenses                                        409,500               351,000

Contribution margin                                       175,500              234,000

Fixed expenses                                              180,000              252,000

Net operating loss                                          $(4,500)           $( 18,000)

New Cm ratio=  Contribution Margin/ Sales Revenue

                      = $ 234,000 $ 585,000 = 0.4

Break-even point in  dollars=  Fixed Costs/ 1- (variable Cost/ Sales)

                                            =  252,000/ 1- (351,000/ 585,000)

                                             = 252,000/ 1-0.6

                                               = 252,000/0.4= $ 630,000

The resulting $ 630,000 is the break even point at which neither a loss nor a profit is incurred.This can be checked as follows.

Sales                                                                         $ 630,000

Variable Costs  ( 60 % $ 630,000)                          $ 378,000

Contribution Margin                                                   $ 252,000

Less Fixed Expense                                                   $ 252,000

Profit                                                                                 0            

Break even point in units =  Fixed Costs/ Contribution Margin in units

                                         = $ 252,000/ (30-18)

                                          =$ 252,000/ $ 12= 21,000 units

Two Contribution format Income Statements:

                                                                                                   Automated

Sales (26,000 units at $30 per unit)           $780,000            $780,000

Variable expenses                                        546,000               468,000

Contribution margin                                       234,000                312,000

Fixed expenses                                              180,000              252,000

Net operating Profit                                     $ 54,000                $ 60,000

Working:

Variable Costs per unit = $ 409500/19500=  $ 21

After reduction variable costs = $ 21- $3= $ 18