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 (13,000 units × $30 per unit) | $ | 390,000 | |
| Variable expenses | | 195,000 | |
| Contribution margin | | 195,000 | |
| Fixed expenses | | 217,500 | |
| Net operating loss | $ | (22,500 | ) |
|
Required:
1. Compute the company’s CM ratio and its break-even point inunit sales and dollar sales.
2. The president believes that a $6,500 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $89,000 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 the original data. The sales manager is convincedthat a 10% reduction in the selling price, combined with anincrease of $39,000 in the monthly advertising budget, will doubleunit sales. If the sales manager is right, what will be the revisednet operating income (loss)?
4. Refer to the original data. The Marketing Department thinksthat a fancy new package for the laptop computer battery would growsales. The new package would increase packaging costs by $0.50 perunit. Assuming no other changes, how many units would have to besold each month to attain a target profit of $4,200?
5. Refer to the original data. By automating, the company couldreduce variable expenses by $3 per unit. However, fixed expenseswould increase by $57,000 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 sell 20,900 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 the company automate its operations(Assuming that the company expects to sell 20,900)?
