Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below: Sales (12,800 units × $20 per unit) $ 256,000 Variable expenses 153,600 Contribution margin 102,400 Fixed expenses 114,400 Net operating loss $ (12,000 ) Required: 1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,700 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $84,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income?

Results are below.

Explanation:

Giving the following information:

Sales (12,800 units × $20 per unit) $256,000

Variable expenses 153,600 (12)

Contribution margin 102,400

Fixed expenses 114,400 Net operating loss $ (12,000 )

First, we need to calculate the contribution margin ratio and the break-even point in units and dollars:

Contribution margin ratio= unitary CM / Selling price

Contribution margin ratio= total CM / Sales

Contribution margin ratio= 102,400 / 256,000

Contribution margin ratio= 0.4

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 114,400 / (20 - 12)

Break-even point in units= 14,300

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 114,400 / 0.4

Break-even point (dollars)= $286,000

Now, we need to calculate the effect on the income of increasing the advertising budget:

Effect on income= increase in contribution margin - increase in fixed costs

Effect on income= 84,000*0.4 - 6,700

Effect on income= $26,900 increase

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.