Due to erratic sales of its sole producta high-capacity battery for laptop computersPEM Inc. has been

experiencing difficulty for some time. The companys contribution format income statement for the most recent

month is given below:

Sales (19 500 x 30 per unit) 585 000 CAD

Variables expenses 409 500 CAD

Contribution Margin 175 500 CAD

Fixed Expenses 180 000 CAD

Operating Loss 4 500 CAD

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 companys monthly net operating income or loss.

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. 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, 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 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. At what number of unit sales would the company be indifferent between automating operations versus not

automating? Would you recommend that the company automate its operations? Explain.