Due to erratic sales of its sole 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: 540,000 Sales (13,500 units * $40 per unit) Variable expenses 324,000 216,000 Contribution margin 240,000 Fixed expenses Net operating loss $(24,000) Required: 1. Compute the company's CM ratio and its break-even point in both unit sales and dollar sales. Answer is complete and correct. 40 % CM ratio Break-even point in 15,000 2. The president believes that a $6,500 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $81,000 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.) Answer is complete but not entirely correct. Increases by $ 74,500 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? Answer is complete but not entirely correct. PEM, Inc. Contribution Income Statement Sales 36 Cost of goods sold 27,000 Contribution margin (26,964) 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted? Answer is complete but not entirely correct. PEM, Inc. Contribution Income Statement Sales $ 36 Cost of goods sold 27,000 Contribution margin (26,964) Fixed expenses 240,000 Net operating income $ (266,964) 5. Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $55,000 each month. a. Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars. Do not round your intermediate calculations. Round up your final break even answers to the nearest whole number.) % CM ratio Break-even point in units Break-even point in dollars b. Assume that the company expects to sell 20,600 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. Answer is not complete. PEM, Inc. Contribution Income Statement Not Automated Automated Total Per Unit % Total Per Unit % % % % % 0 0 0 % 0 0 0 % $ 0 $ 0