Question

Cosmo, Inc. produces memory enhancement kits for DVR machines. Sales have been very erratic, with some months showing a loss. The company's contribution format income statement for the most recent month is given below:

Sales (13,500 units at $20 per unit) $270,000
Variable expenses $189,000
Contribution margin (CM) $81,000
Fixed expenses $90,000
Net operating loss $(9,000)

Required:

a) Compute the company's break-even point in both units and dollars.
b) The sales manager feels that an $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is right, what will be the effect on the company's monthly net operating income or loss?
c) Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?
d) Refer to the original data. The company's advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to earn a pretax profit of $4,500?

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Cosmo, Inc.

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