Due to erratic sales of its sole product a high-capacity battery for laptop computers PEM, Inc., has been experiencing difficulty for some time. The company's contribution format income statement for the most recent month is given below:

Sales (19,500 units at $30 per unit)	$585,000
Variable expenses	409,500
Contribution margin	175,500
Fixed expenses	180,000
Net operating loss	$(4,500)

Requirement 1:

Compute the company's CM ratio and its break-even point in both units and dollars.

CM ratio	%
Break-even point in units	units
Break-even point in dollars	$

Requirement 2:

The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, by how much will the company's net operating income increase or decrease? (Use the incremental approach in preparing your answer.)

Net operating income

$

(Click to select)increasedecrease

Requirement 3:

Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?(Net loss should be indicated by a minus sign. Omit the "$" sign in your response.)

Sales	$
Variable expenses
Contribution margin
Fixed expenses
(Click to select)Net operating lossNet operating income	$

Requirement 4:

Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750?(Round units to nearest whole unit.)

Sales

units

Requirement 5:

Refer to the original data. By automating certain operations, the company could reduce variable costs by $3 per unit. However, fixed costs would increase by $72,000 each month.

(a)	Compute the new CM ratio and the new break-even point in both units and dollars.(Round units to nearest whole unit, CM ratio to nearest whole percent. Omit the "%" and "$" signs in your response.)

CM ratio	%
Break-even point in units	units
Break-even point in dollars	$

(b)

Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that 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.)(Omit the "$" and "%" signs in your response.)

	Not Automated			Automated
	Total	Per Unit	%	Total	Per Unit	%
Sales (26,000 units)	$	$		$	$
Variable expenses
Contribution margin		$			$
Fixed expenses
Net operating income	$			$

Answer rating: 100% (QA)

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