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 (13,500 units $20 per unit)	$	270,000
Variable expenses		162,000
Contribution margin		108,000
Fixed expenses		120,000
Net operating loss	$	(12,000)

2.	The president believes that a $6,100 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $89,000 increase in monthly sales. If the president is right, what will be the effect on the companys monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

Increases

by

__________

5.	Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $57,000 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	70	%
Break-even point in units	12,643
Break-even point in dollars	_______

B) Assume that the company expects to sell 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

PEM, Inc.
Contribution Income Statement
	Not Automated				Automated
	Total	Per Unit	%		Total	Per Unit	%
Sales	$402,000			%				%
Variable expenses	241,200			%				%
Contribution margin	160,800			%				%
Fixed expenses	120,000
Net operating income	$40,800