Reference no: EM132573148

Question - Due to erratic sales, Mercer Company has been experiencing difficulty for some time. The company's income statement for the most recent month is given below:

Sales (19,500 units x $30) $585,000

Less variable expenses 409,500

Contribution Margin 175,500

Less fixed expenses 180,000

Net loss $(4,500)

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

2. The president is certain that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, what will be the effect on the company's monthly net income or loss?

3. Refer to the original data. The sales manager is convinced that a 10 percent reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will cause unit sales to double. What will the new income statement look like if these changes are adopted?

4. Refer to the original data. The marketing department thinks that a fancy new package for Mercer Company's product would help sales. The new package would increase packaging costs by 75 cent per unit. Assuming no other changes in cost behaviour, how many units would have to be sold each month to earn a profit of $9,750?

5. Refer to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase by $72,000 each month.

(i) Compute the new CM ratio and the new break-even point in both units and dollars.

Refer to the original data. A large distributor has offered to make a bulk purchase of 5,000 units each month on a special price basis. Variable selling expenses of $1 per unit could be avoided on this sale. What price per unit should Mercer Company quote to this distributor if Mercer desires to make an overall net income of $18,000 each month for the company as a whole? (Present sales would not be disturbed by this order.)