Copius Copy, Inc. produces cartridge toner for copy machines. Sales have been very erratic, with some months showing a profit, and some months showing a loss. The companys contribution margin format income statement for the most recent month is given below:

Sales (13,600 units at $20 per unit) $272,000

Variable costs 190,000

Contribution Margin 82,000

Fixed costs 88,000

Net operating loss $ (6,000)

Required:

1. Compute the companys CM ratio and its break-even point in both units and sales dollars.

2. The sales manager feels that an $8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $70,000 increase in monthly sales. If the sales manager is correct, what will be the effect on the companys net operating income or loss?

3. Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $34,000 in the monthly advertising budget, will double unit sales. Prepare a new contribution margin format income statement, assuming that these changes are implemented.

4. Refer to the original data. The companys advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $.50 per unit. Assuming no other changes, how many units would need to be sold each month to earn a profit of $4,000?

5. Refer to the original data. By automating its production processes, the company could cut its variable costs in half. However, fixed costs would increase by $115,000 per month.

a. Compute the new CM ratio and break-even point, both in units and sales dollars.

b. Assume that the company expects to sell 20,000 units next month. Prepare two contribution margin format income statements, one assuming that operations are not

automated, and one assuming that they are automated. Would you recommend that the company automate its operations? Why, or why not?