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

Total Sales (19,500 units * $30 per unit) $585,000

Variable Costs 409,500

Contribution Margin 175,500

Fixed Costs 180,000

Net Operating Loss $(4,500)

Required 1. Compute the companys Contribution Margin Ratio and its Break-Even Point in Units 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 increase unit sales and the total sales by $80,000 per month. If this is correct, what will be the increase or decrease in the companys monthly net operating income?

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 unit sales. If the sales manager is right, what will be the revised net operating income or loss?

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 75 cents per unit. Assuming no other charges, how many units would have to be sold each month to attain a target profit of $9,750.

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expense would increase by $72,000 per month.

a. Compute the new CM ratio and the new Break-Even Point in unit sales and dollar sales.

b. Assume that the company expects to sell 26,000 units next month. Prepare two Contribution Margin Income Statements, one assuming that operations are not automated and one assuming that they are.

c. Would you recommend that the company automate its operations? Why?