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Hello, this is Bing. I can help you with your accounting questions. 😊

Here are the answers to your questions based on the given data:

1. The CM ratio is the contribution margin divided by the sales. The

contribution margin is the difference between sales and variable
expenses. The break-even point is the level of sales where the
contribution margin equals the fixed expenses. It can be expressed in
both units and dollars. To compute the CM ratio and the break-even
point, we need the following formulas:

$$ \text{CM ratio} = \frac{\text{Contribution margin}}{\text{Sales}} = \frac{\

text{Sales} - \text{Variable expenses}}{\text{Sales}} $$

$$ \text{Break-even point in units} = \frac{\text{Fixed expenses}}{\

text{Contribution margin per unit}} = \frac{\text{Fixed expenses}}{\text{Selling
price per unit} - \text{Variable expenses per unit}} $$

$$ \text{Break-even point in dollars} = \frac{\text{Fixed expenses}}{\text{CM

ratio}} = \frac{\text{Fixed expenses}}{\frac{\text{Sales} - \text{Variable
expenses}}{\text{Sales}}} $$

Using the given data, we can calculate the CM ratio and the break-even point
as follows:

$$ \text{CM ratio} = \frac{90,000 - 63,000}{90,000} = 0.3 = 30% $$

$$ \text{Break-even point in units} = \frac{30,000}{15 - 10.50} = 12,000 \

text{ units} $$

$$ \text{Break-even point in dollars} = \frac{30,000}{0.3} = 100,000 \

text{ dollars} $$

2. To use the incremental approach, we need to compare the changes in

revenues and expenses that result from the proposed action. In this
case, the proposed action is to increase the monthly advertising budget
by $8,000 and increase the monthly sales by $70,000. The effect on the
monthly net operating income or loss is:
|Incremental Analysis|
|:--|
|Increase in monthly sales|$70,000|
|Increase in variable expenses (70% of sales)|$49,000|
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|Increase in contribution margin|$21,000|
|Increase in fixed expenses (advertising)|$8,000|
|Increase in net operating income|$13,000|

Therefore, if the sales manager is right, the company's monthly net operating
income will increase by $13,000.

3. To construct a new contribution format income statement, we need to

apply the changes in the selling price, the advertising budget, and the
unit sales to the original data. The changes are:

● The selling price per unit is reduced by 10%, from $15 to $13.50.

● The advertising budget is increased by $35,000, from $30,000 to

$65,000.

● The unit sales are doubled, from 6,000 to 12,000.

The new income statement is:

|Contribution Format Income Statement (New Scenario)|
|:--|
|Sales (12,000 units x $13.50)|$162,000|
|Variable expenses (70% of sales)|$113,400|
|Contribution margin|$48,600|
|Fixed expenses|$95,000|
|Net operating income (loss)|-$46,400|

The new scenario results in a net operating loss of $46,400, which is worse
than the original net operating income of $3,000.

4. To find the number of units that must be sold to earn a target profit, we
need to use the following formula:

$$ \text{Required sales in units} = \frac{\text{Fixed expenses} + \text{Target

profit}}{\text{Contribution margin per unit}} $$

In this case, the target profit is $4,500 and the contribution margin per unit is
affected by the increase in packaging costs by $0.60 per unit. The new
contribution margin per unit is:

$$ \text{Contribution margin per unit} = \text{Selling price per unit} - \

text{Variable expenses per unit} - \text{Packaging costs per unit} $$

$$ \text{Contribution margin per unit} = 15 - 10.50 - 0.60 = 3.90 $$

Using the formula, the required sales in units are:

$$ \text{Required sales in units} = \frac{30,000 + 4,500}{3.90} = 8,846 \

text{ units} $$
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Therefore, the company must sell 8,846 units each month to earn a profit of
$4,500 with the new package.

5. To answer this question, we need to consider the effects of automation

on the variable expenses, the fixed costs, the CM ratio, and the break-
even point.

a. By automating, the company could slash its variable expenses in half, from
70% of sales to 35% of sales. This means that the variable expenses per unit
would also be halved, from $10.50 to $5.25. The CM ratio would increase, since
the contribution margin per unit would increase. The new CM ratio is:

$$ \text{CM ratio} = \frac{\text{Contribution margin}}{\text{Sales}} = \frac{\

text{Sales} - \text{Variable expenses}}{\text{Sales}} $$

$$ \text{CM ratio} = \frac{15 - 5.25}{15} = 0.65 = 65% $$

The fixed costs would increase by $118,000 per month, from $30,000 to
$148,000. The break-even point would change, since both the contribution
margin per unit and the fixed costs are different. The new break-even point in
both units and dollars is:

$$ \text{Break-even point in units} = \frac{\text{Fixed expenses}}{\

text{Contribution margin per unit}} = \frac{\text{Fixed expenses}}{\text{Selling
price per unit} - \text{Variable expenses per unit}} $$

$$ \text{Break-even point in units} = \frac{148,000}{15 - 5.25} = 18,462 \

text{ units} $$

$$ \text{Break-even point in dollars} = \frac{\text{Fixed expenses}}{\text{CM

ratio}} = \frac{\text{Fixed expenses}}{\frac{\text{Sales} - \text{Variable
expenses}}{\text{Sales}}} $$

$$ \text{Break-even point in dollars} = \frac{148,000}{0.65} = 227,692 \

text{ dollars} $$

b. Assuming that the company expects to sell 20,000 units next month, the
two contribution format income statements, one assuming that operations are
not automated and one assuming that they are, are:
|Contribution Format Income Statement (Not Automated)|
|:--|
|Sales (20,000 units x $15)|$300,000|
|Variable expenses (70% of sales)|$210,000|
|Contribution margin|$90,000|
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|Fixed expenses|$30,000|
|Operating income|$60,000|
|Contribution Format Income Statement (Automated)|
|:--|
|Sales (20,000 units x $15)|$300,000|
|Variable expenses (35% of sales)|$105,000|
|Contribution margin|$195,000|
|Fixed expenses|$148,000|
|Operating income|$47,000|

c. Based on the income statements, I would not recommend that the company
automate its operations, since it would result in a lower operating income
($47,000 vs. $60,000). However, this recommendation is based on the
assumption that the sales volume remains constant at 20,000 units. If the sales
volume increases beyond the break-even point, then automation might be
more profitable. Therefore, the company should also consider the potential
effects of automation on the demand for its product, the quality of its product,
and the long-term competitiveness of its product.

I hope this helps. If you have any other questions, please feel free to ask. 😊

Hello, this is Bing. I can help you with your accounting questions. 😊

Here are the answers to your questions based on the given data:

1. The product’s CM ratio is the contribution margin divided by the sales. The
contribution margin is the difference between sales and variable expenses.
The CM ratio can be expressed as a percentage or a decimal. The formula
for the CM ratio is:

CM ratio=Contribution marginSales=Sales−Variable expensesSalesCM ratio=Sale

sContribution margin=SalesSales−Variable expenses

Using the given data, we can calculate the product’s CM ratio as follows:

CM ratio=15−615=0.6=60%CM ratio=1515−6=0.6=60%

This means that for every dollar of sales, 60 cents goes toward covering the fixed
expenses and generating profit.

2. To use the CM ratio to determine the break-even point in sales dollars, we

need the following formula:

Break-even point in sales dollars=Fixed expensesCM ratioBreak-even point in sale

s dollars=CM ratioFixed expenses

Using the given data, we can calculate the break-even point in sales dollars as
follows:
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Break-even point in sales dollars=180,0000.6=300,000 dollarsBreak-even point in
sales dollars=0.6180,000=300,000 dollars

This means that the company needs to generate $300,000 of sales to break even.

3. To estimate the impact on net operating income of a change in sales, we can

use the CM ratio and multiply it by the change in sales. The formula is:

Change in net operating income=CM ratio×Change in salesChange in net operating

income=CM ratio×Change in sales

Using the given data, we can estimate the impact on net operating income of a
$45,000 increase in sales as follows:

Change in net operating income=0.6×45,000=27,000Change in net operating inco

me=0.6×45,000=27,000

This means that the net operating income will increase by $27,000 if the sales
increase by $45,000.

4. To compute the degree of operating leverage at the current level of sales, we

need the following formula:

Degree of operating leverage=Contribution marginNet operating incomeDegree of

operating leverage=Net operating incomeContribution margin

Using the given data, we can calculate the degree of operating leverage as follows:

Degree of operating leverage=216,00036,000=6Degree of operating leverage=36,0

00216,000=6

This means that a 1% change in sales will result in a 6% change in net operating
income.

To estimate the change in net operating income if sales increase by 15% next year,
we can use the degree of operating leverage and multiply it by the percentage
change in sales. The formula is:

Percentage change in net operating income=Degree of operating leverage×Percenta

ge change in salesPercentage change in net operating income=Degree of operating
leverage×Percentage change in sales

Using the given data, we can estimate the percentage change in net operating
income as follows:

Percentage change in net operating income=6×0.15=0.9=90%Percentage change in

net operating income=6×0.15=0.9=90%
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This means that the net operating income will increase by 90% if the sales increase
by 15%. To find the actual amount of net operating income, we can multiply the
current net operating income by 1 plus the percentage change. The formula is:

Net operating income after change=Net operating income before change×(1+Perce

ntage change in net operating income)Net operating income after change=Net oper
ating income before change×(1+Percentage change in net operating income)

Using the given data, we can calculate the net operating income after the change as
follows:

Net operating income after change=36,000×(1+0.9)=36,000×1.9=68,400Net operat

ing income after change=36,000×(1+0.9)=36,000×1.9=68,400

This means that the net operating income will be $68,400 if the sales increase by
15%.

5. To prepare two contribution format income statements, one showing the

results of last year’s operations and one showing what the results of
operations would be if the changes were made, we need to apply the
changes in the selling price, the advertising expenditures, and the unit sales
to the original data. The changes are:

 The selling price per unit is reduced by 10%, from $15 to $13.50.
 The advertising expenditures are increased by $70,000, from $180,000 to
$250,000.
 The unit sales are increased by 50%, from 28,000 to 42,000.

The two income statements are:

Contribution Format Income Statement (Last Year)

Sales (28,000 units x $15)

Variable expenses (28,000 units x $6)

Contribution margin

Fixed expenses

Net operating income

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Contribution Format Income Statement (New Scenario)

Sales (42,000 units x $13.50)

Variable expenses (42,000 units x $6)

Contribution margin

Fixed expenses

Net operating income

To evaluate the sales manager’s suggestion, we can compare the net operating
income of the two scenarios. The new scenario results in a lower net operating
income ($65,000 vs. $72,000). Therefore, I would not recommend that the
company do as the sales manager suggests, since it would reduce the profitability
of the company.