Data P5-1:
Due to erratic sales of its 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 along with other information.
PEM, INC.
Information from recent month's income statement:
Sales		$585,000
Units sold	19,500
Sales price per unit	$30
Less variable expenses		409,500
Contribution margin		175,500
Less fixed expenses		180,000
Net operating loss		($4,500)
Information for Part 2:
Increase in monthly advertising budget		$16,000
Increase in monthly sales		$80,000
Information for Part 3:
Reduction in selling price		10%
Increase in monthly advertising budget		$60,000
Increase in monthly unit sales		100%
Information for Part 4:
Increase in packaging cost per unit		$0.75
Targeted profit each month		$9,750
Information for Part 5:
Reduction in variable costs per unit		$3
Increase in monthly fixed costs		$72,000
Expected sales in units		26,000
Required:
1. Compute the company's CM ratio and its break-even point in both units and dollars.
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 cause unit sales to
double. What will the new contribution format income statement look like if these changes are adopted?
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 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 certain operations, the company could reduce variable costs by
$3 per unit. However, fixed costs would increase by $72,000 each month.
a. Compute the new CM ratio and the new break-even point in both units and dollars.
b. Assume that the company expects to sell 26,000 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.)
c. Would you recommend that the company automate its operations? Explain.

$585,000

19,500

$30

409,500

175,500

180,000

($4,500)

$16,000

$80,000

10%

$60,000

100%

$0.75

$9,750

$3

$72,000

26,000