1. PEM, Incorporated, is experiencing financial difficulty due to erratic sales of its only product, a high-capacity battery for laptop computers. The company’s contribution format income statement for the most recent month is given below:
Sales (13,500 units × $20 per unit)$ 270,000
Variable expenses162,000
Contribution margin108,000
Fixed expenses120,000
Net operating loss$ (12,000)
Required:
Compute the company’s CM ratio and its break-even point in unit sales and dollar sales.
The president believes a $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will increase unit sales and the total sales by $84,000 per month. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income?
Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $32,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?
Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase variable costs by $0.70 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,700?
Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 each month.Compute the new CM ratio and the new break-even point in unit sales and dollar sales.
Assume the company expects to sell 20,800 units next month. Prepare two contribution format income statements, one assuming operations are not automated and one assuming they are. (Show data on a per-unit and percentage basis, as well as in total, for each alternative.)
Would you recommend the company automate its operations (Assuming that the company expects to sell 20,800 units)?
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