Due to erratic sales of its sole product—a high-capacity batteryfor laptop computers—PEM, Inc., has been experiencing financialdifficulty for some time. The company’s contribution format incomestatement for the most recent month is given below:
Sales (12,600 units × $30 per unit) $ 378,000
Variable expenses 189,000
Contribution margin 189,000
Fixed expenses 211,500
Net operating loss $ (22,500 )
Required: 1. Compute the company’s CM ratio and its break-evenpoint in unit sales and dollar sales. 2. The president believesthat a $6,800 increase in the monthly advertising budget, combinedwith an intensified effort by the sales staff, will result in an$87,000 increase in monthly sales. If the president is right, whatwill be the increase (decrease) in the company’s monthly netoperating income? 3. Refer to the original data. The sales manageris convinced that a 10% reduction in the selling price, combinedwith an increase of $34,000 in the monthly advertising budget, willdouble unit sales. If the sales manager is right, what will be therevised net operating income (loss)? 4. Refer to the original data.The Marketing Department thinks that a fancy new package for thelaptop computer battery would grow sales. The new package wouldincrease packaging costs by 0.50 cents per unit. Assuming no otherchanges, how many units would have to be sold each month to attaina target profit of $4,600? 5. Refer to the original data. Byautomating, the company could reduce variable expenses by $3 perunit. However, fixed expenses would increase by $54,000 each month.a. Compute the new CM ratio and the new break-even point in unitsales and dollar sales. b. Assume that the company expects to sell20,200 units next month. Prepare two contribution format incomestatements, one assuming that operations are not automated and oneassuming that they are. (Show data on a per unit and percentagebasis, as well as in total, for each alternative.) c. Would yourecommend that the company automate its operations (Assuming thatthe company expects to sell 20,200)?
