Reference no: EM133037135

Question - Mercury Inc., produces memory enhancement kits for fax machines. Sales have been volatile, with some months showing a profit and some months showing a loss. The company's contribution format income statement for the most recent month is given below (Original data):

Sales (13,500 units at $20 per unit) $270,000

Variable expenses 189,000

Contribution Margin 81,000

Fixed Expenses 90,000

Operating loss -9,000

Part A - Compute the company's CM ratio and its break-even point in both units and dollars.

Part B - Refer to the original data. The company is considering automating. By automating, the company could slash its variable expenses per unit in half. However, fixed costs would increase by $118,000 per month.

1. Compute the new CM ratio and the new break-even point in units.

2. Assume that the company expects to sell 20,000 units next month. Prepare a contribution format income statement, assuming that operations are automated. Ignore taxation.

3. Compute the operating leverage ratio with this plan.

4. Assume the company automates. Also assume that the taxation rate is 60% of operating income. What is the minimum selling price per unit that it must achieve to obtain an after tax income of $10,000, if it does sell 20,000 units?