Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been...

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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 (13,400 units × $20 per unit) $ 268,000
Variable expenses 134,000
Contribution margin 134,000
Fixed expenses 149,000
Net operating loss $ (15,000 )
Required: 1. Compute the company’s CM ratio and its break-evenpoint in unit sales and dollar sales.
2. The president believes that a $6,400 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $87,000 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 $32,000 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 centsper unit. Assuming no other changes, how many units would have tobe sold each month to attain a target profit of $5,000?
5. Refer to the original data. By automating, the company couldreduce variable expenses by $3 per unit. However, fixed expenseswould increase by $58,000 each month. a. Compute the new CM ratioand the new break-even point in unit sales and dollar sales. b.Assume that the company expects to sell 21,000 units next month.Prepare two contribution format income statements, one assumingthat operations are not automated and one assuming that they are.(Show data on a per unit and percentage basis, as well as in total,for each alternative.) c. Would you recommend that the companyautomate its operations (Assuming that the company expects to sell21,000)?

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4.5 Ratings (683 Votes)

Req 1 CM ratio Selling price per unit 20 Less variable cost per unit 10 Contribution margin per unit 10 CM ratio Contirbution Selling price 100 10 20 100 50 Break even units Fixed cost 149000 Divide CM perr unit 10 Break even units 14900 units Break even in Fixed cost 149000 See Answer

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Transcribed Image Text

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 (13,400 units × $20 per unit) $ 268,000Variable expenses 134,000Contribution margin 134,000Fixed expenses 149,000Net operating loss $ (15,000 )Required: 1. Compute the company’s CM ratio and its break-evenpoint in unit sales and dollar sales.2. The president believes that a $6,400 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $87,000 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 $32,000 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 centsper unit. Assuming no other changes, how many units would have tobe sold each month to attain a target profit of $5,000?5. Refer to the original data. By automating, the company couldreduce variable expenses by $3 per unit. However, fixed expenseswould increase by $58,000 each month. a. Compute the new CM ratioand the new break-even point in unit sales and dollar sales. b.Assume that the company expects to sell 21,000 units next month.Prepare two contribution format income statements, one assumingthat operations are not automated and one assuming that they are.(Show data on a per unit and percentage basis, as well as in total,for each alternative.) c. Would you recommend that the companyautomate its operations (Assuming that the company expects to sell21,000)?