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 (13,300units × $30 per unit) $ 399,000 Variable expenses 239,400Contribution margin 159,600 Fixed expenses 177,600 Net operatingloss $ (18,000 ) Required: 1. Compute the company’s CM ratio andits break-even point in unit sales and dollar sales. 2. Thepresident believes that a $6,600 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $88,000 increase in monthly sales.If the president is right, what will be the increase (decrease) inthe company’s monthly net operating income? 3. Refer to theoriginal data. The sales manager is convinced that a 10% reductionin the selling price, combined with an increase of $36,000 in themonthly advertising budget, will double unit sales. If the salesmanager is right, what will be the revised net operating income(loss)? 4. Refer to the original data. The Marketing Departmentthinks that a fancy new package for the laptop computer batterywould grow sales. The new package would increase packaging costs by0.60 cents per unit. Assuming no other changes, how many unitswould have to be sold each month to attain a target profit of$4,600? 5. Refer to the original data. By automating, the companycould reduce variable expenses by $3 per unit. However, fixedexpenses would increase by $56,000 each month. a. Compute the newCM ratio and the new break-even point in unit sales and dollarsales. b. Assume that the company expects to sell 20,200 units nextmonth. Prepare two contribution format income statements, oneassuming that operations are not automated and one assuming thatthey are. (Show data on a per unit and percentage basis, as well asin total, for each alternative.) c. Would you recommend that thecompany automate its operations (Assuming that the company expectsto sell 20,200)?
