Question

PROBLEM 5-22 Basics of CVP Analysis; Cost Structure [LO5-1, L05-3, L05-4, L05-5, L05-6] 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 state- ment for the most recent month is given below: Sales (19,500 units X $30 per unit) ..... Variable expenses .. Contribution margin. Fixed expenses ... Net operating loss ... ....... $585,000 409,500 175,500 180,000 $ (4,500) Required: 1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales. 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, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.) 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 double 4. unit sales. What will the new contribution format income statement look like if these changes are adopted? 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? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. b. Assume that the company expects to sell 26,000 units next month. Prepare two contribu- tion 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.) c. Would you recommend that the company automate its operations? Explain.