Tracey Incorporated has been experiencing difficulty for sometime due to erratic sales of its only product. The company’scontribution format income statement for the most recent month isgiven below:

	Total	Per Unit	Percent of Sales
Sales (19,500 units)	$585,000
Variable expenses	409,500
Contribution margin	175,500
Fixed expenses	180,000
Net operating loss	($4,500)

1. Complete the table above with the per unit information and thepercent of sales information.

2. The president believes that a $16,000 increase in the monthlyadvertising budget, combined with an intensified effort by thesales staff, will result in an $80,000 increase in monthly sales.If the president is right, what will be the effect on the company’smonthly net operating income or loss?

3. Refer to the original data. The sales manager is convinced thata 10% reduction in the selling price, combined with an increase of$60,000 in the monthly advertising budget, will double unit sales.What will the new contribution format income statement look like ifthese changes are adopted? Should the changes be adopted?

	Total	Per Unit	Percent of Sales
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income

4. Refer to the original data. The Marketing Department thinksthat a fancy new package for the product would help sales. The newpackage would increase packaging costs by 75 cents per unit.Assuming no other changes, how many units would have to be soldeach month to earn a profit of $9,750?

5. Refer to the original data. By automating, the company couldreduce variable expense by $3 per unit. However, fixed expenseswould increase by $72,000 each month. Assuming that the companyexpects to sell 26,000 units next month, prepare two contributionformat income statements, one assuming that operations are notautomated and one assuming that they are.

NOT AUTOMATED

	Total	Per Unit	Percent of Sales
Sales (26,000 units)
Variable expenses
Contribution margin
Fixed expenses
Net operating income

AUTOMATED

	Total	Per Unit	Percent of Sales
Sales (26,000 units)
Variable expenses
Contribution margin
Fixed expenses
Net operating income

1. Computer the break-even point in both units sales and dollarsales for both the Not Automated and the Automated scenarios.

2. Computer the margin of safety in units, dollars, and percentagefor both the Not Automated and the Automated scenarios.

3. Computer the degree of operating leverage for both the NotAutomated and the Automated scenarios.

4. Compute the unit sales volume at which the net operating incomeis the same for either metho (This would be ‘the point ofindifference’ and it is computed by taking the difference in thefixed expenses and dividing it by the difference in the variableexpenses per unit.)

5. Would you recommend that the company automate its operations?Explain.