Question

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 (12,900 units x $20 per unit) $ 258,000
Variable expenses 129,000
Contribution margin 129,000
Fixed expenses 144,000
Net operating loss $ (15,000)

Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $36,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

Answer 1

the revised net operating income is $ 26,400

Step-by-step explanation:

Effect the Changes on the Units, Selling Price and Fixed Cost as described on the Original Income Statement.

Revised Income Statement

Sales( (12,900 units x 2)× ($20 per unit×0.90)) $ 464,400

Variable expenses ( $10× (12,900 units x 2)) ($ 258,000)

Contribution margin $206,400

Fixed expenses (144,000 + $36,000 ) ($180,000)

Net operating loss $ 26,400