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QUESTION 1 DotCom Inc. has been experiencing difficulty in selling its sole product, IP-20 since March 2020 as a result of Covid-19 pandemic. Provided below the company's contribution format income statement for the most recent month: RM Sales (19,500 units x RM30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 585,000 409,500 175,500 180,000 (4.500) Required: a. Compute contribution margin ratio and break-even point (in units and value) of the company. b. In order to improve sales, the Sales Manager suggests to reduce 10% of the selling price and increase the monthly advertising budget of RM60,000. He convinces that the action would cause unit sales to double. Evaluate the effect of the changes on the company's monthly net operating income. c. The Production Manager believes that by automating certain operations, the company could reduce variable costs by RM3 per unit and sales would increase by 1/3. However, this decision would increase fixed costs by RM72,000 each month. i. Compute the new break-even point in both units and value. ii. Calculate the expected net operating income/(loss) of the company. iii. Based on your answer in c(ii) above, evaluate whether the company should automate its operation.

QUESTION 1 DotCom Inc. has been experiencing difficulty in selling its sole product, IP-20 since March 2020 as a result of Covid-19 pandemic. Provided below the company's contribution format income statement for the most recent month: RM Sales (19,500 units x RM30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 585,000 409,500 175,500 180,000 (4.500) Required: a. Compute contribution margin ratio and break-even point (in units and value) of the company. b. In order to improve sales, the Sales Manager suggests to reduce 10% of the selling price and increase the monthly advertising budget of RM60,000. He convinces that the action would cause unit sales to double. Evaluate the effect of the changes on the company's monthly net operating income. c. The Production Manager believes that by automating certain operations, the company could reduce variable costs by RM3 per unit and sales would increase by 1/3. However, this decision would increase fixed costs by RM72,000 each month. i. Compute the new break-even point in both units and value. ii. Calculate the expected net operating income/(loss) of the company. iii. Based on your answer in c(ii) above, evaluate whether the company should automate its operation.

Financial And Managerial Accounting
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter25: Differential Analysis And Product Pricing
Section: Chapter Questions
Problem 2BE
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QUESTION 1 DotCom Inc. has been experiencing difficulty in selling its sole product, IP-20 since March 2020 as a result of Covid-19 pandemic. Provided below the company's contribution format income statement for the most recent month: RM Sales (19,500 units x RM30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 585,000 409,500 175,500 180,000 (4.500) Required: a. Compute contribution margin ratio and break-even point (in units and value) of the company. b. In order to improve sales, the Sales Manager suggests to reduce 10% of the selling price and increase the monthly advertising budget of RM60,000. He convinces that the action would cause unit sales to double. Evaluate the effect of the changes on the company's monthly net operating income. c. The Production Manager believes that by automating certain operations, the company could reduce variable costs by RM3 per unit and sales would increase by 1/3. However, this decision would increase fixed costs by RM72,000 each month. i. Compute the new break-even point in both units and value. ii. Calculate the expected net operating inconme/(loss) of the company. ii. Based on your answer in c(ii) above, evaluate whether the company should automate its operation. d. On the other hand, the Marketing Manager thinks that sales would increase if the packaging of the product is more attractive and fancier to the customers. The decision would increase packaging cost by RM0.75 per unit. Assuming no other changes, determine number of units would have to be sold each month to earn a profit of RMI0,000.
Transcribed Image Text:QUESTION 1 DotCom Inc. has been experiencing difficulty in selling its sole product, IP-20 since March 2020 as a result of Covid-19 pandemic. Provided below the company's contribution format income statement for the most recent month: RM Sales (19,500 units x RM30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss 585,000 409,500 175,500 180,000 (4.500) Required: a. Compute contribution margin ratio and break-even point (in units and value) of the company. b. In order to improve sales, the Sales Manager suggests to reduce 10% of the selling price and increase the monthly advertising budget of RM60,000. He convinces that the action would cause unit sales to double. Evaluate the effect of the changes on the company's monthly net operating income. c. The Production Manager believes that by automating certain operations, the company could reduce variable costs by RM3 per unit and sales would increase by 1/3. However, this decision would increase fixed costs by RM72,000 each month. i. Compute the new break-even point in both units and value. ii. Calculate the expected net operating inconme/(loss) of the company. ii. Based on your answer in c(ii) above, evaluate whether the company should automate its operation. d. On the other hand, the Marketing Manager thinks that sales would increase if the packaging of the product is more attractive and fancier to the customers. The decision would increase packaging cost by RM0.75 per unit. Assuming no other changes, determine number of units would have to be sold each month to earn a profit of RMI0,000.
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