Question

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Sales (19,500 units × $30 per unit) $ 585,000
Variable expenses 409,500
Contribution margin 175,500
Fixed expenses 180,000
Net operating loss $ (4,500)
Required:
1. Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales.

Answer 1

PEM, Inc.'s contribution margin (CM) ratio is 0.3, or 30%. The break-even point is 20,000 units, which corresponds to $600,000 in dollar sales. These figures are calculated using the contribution margin, fixed expenses, and variable costs provided.

Step-by-step explanation:

To determine PEM, Inc.'s contribution margin (CM) ratio and its break-even point in both unit sales and dollar sales, we start by calculating the CM ratio. The CM ratio is found by dividing the contribution margin by total sales. In PEM, Inc.'s case, the contribution margin is $175,500 and total sales are $585,000.

CM ratio = Contribution Margin / Total Sales
= $175,500 / $585,000
= 0.3

The CM ratio is 0.3, or 30%.

Next, to determine the break-even point in units, we divide fixed expenses by the contribution margin per unit. The contribution margin per unit is obtained by subtracting the variable expense per unit from the sales price per unit.

Contribution Margin per Unit = Sales Price per Unit - Variable Expense per Unit
= $30 - ($409,500 / 19,500 units)
= $30 - $21
= $9

Break-Even Point in Units = Fixed Expenses / Contribution Margin per Unit
= $180,000 / $9
= 20,000 units

Lastly, to calculate the break-even point in dollar sales, we multiply the break-even point in units by the sales price per unit.

Break-Even Point in Dollar Sales = Break-Even Point in Units × Sales Price per Unit
= 20,000 units × $30
= $600,000

So, the break-even point for PEM, Inc. is 20,000 units, or $600,000 in dollar sales.