3. Due to erratic sales of its sole producta high-capacity battery for laptop computersPEM, Inc., has been experiencing financial difficulty for some time. The companys contribution format income statement for the most recent month is given below:

ONLY ANSWER QUESTION 5 A & B

Sales (13,300 units x $20 per unit)	$266,000
Variable expenses	$159,600
Contribution margin	$106,400
Fixed expenses	$118,400
Net operating loss	($12,000)

Required:

1. Compute the companys CM ratio and its break-even point in unit sales and dollar sales.

CM ratio	40%
Break-even point in unit sales	14,800
Break-even point in dollar sales	$296,000

2. The president believes that a $6,300 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $90,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the companys monthly net operating income?

Increases by

$29,700

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $33,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

Revised net operating income (loss)

$8,200

4. 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 packaging 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?

Unit sales to attain target profit

16,863

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $54,000 each month.

a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales.

CM ratio	?
Break-even point in unit sales	?
Break-even point in dollar sales	?

b. Assume that the company expects to sell 20,900 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.)

PEM, Inc. Contribution Income Statement Not Automated Total Per Unit % % Automated Per Unit Total % > % 0 % % % 0 % 0 $ 0 $ 0 $ $ 0 $ $ 0