ue to erratic sales of its sole product—a high-capacity battery for laptop compu

Question

ue 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 (13,400 units at $20 per unit) $268,000
Variable expenses
160,800
Contribution margin 107,200
Fixed expenses 119,200
Net operating loss
$(12,000)

Requirement 1:
Compute the company's CM ratio and its break-even point in both units and dollars. (Omit the "%" and "$" signs in your response.)


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


Requirement 2:
The president believes that a $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $71,000 increase in monthly sales. If the president is right, by how much will the company's net operating income increase or decrease? (Use the incremental approach in preparing your answer.) (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Net operating income $

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 $34,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted? (Net loss should be indicated by a minus sign. Omit the "$" sign in your response.)


Sales $
Variable expenses

Contribution margin
Fixed expenses

$

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 .40 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,900?

Sales units


Requirement 5:
Refer to the original data. By automating certain operations, the company could reduce variable expenses in half. However, fixed costs would increase by $121,000 each month.

(a)
Compute the new CM ratio and the new break-even point in both units and dollars. (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 20,600 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 (20,600 units) $ $ $ $
Variable expenses






Contribution margin
$


$

Fixed expenses
Net operating income
$

$

Explanation / Answer

Pem, Inc

Contribution Income statement

For the month ended

Total

Per Unit

Cm Ratio

Sales

$369,000

$20

100%

Less: Variable expense

$221,400

$12

60%

Contribution margins

$147,600

$8

40%

Less: Fixed cost

$127,200

Net operating income

Pem, Inc

Contribution Income statement

For the month ended

Total

Per Unit

Cm Ratio

Sales

$482,400

$18.00

100%

Less: Variable expense

$321,600

$12.00

67%

Contribution margins

$160,800

$6.00

33%

Less: Fixed cost

$127,200

Net operating income

33,600

Pem, Inc

Contribution Income statement

For the month ended

Total

Per Unit

Cm Ratio

Sales

$369,000

$20

100%

Less: Variable expense

$221,400

$12

60%

Contribution margins

$147,600

$8

40%

Less: Fixed cost

$127,200

Net operating income

$20,400

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