Memofax, Inc. produces memory enhancement software for computers. Sales have been very erratic, with some months showing a profit and some months showing a loss. The companys contribution format income statement for the most recent month is given below:

Sales (14,500 units)	$	348,000
Less: Variable expenses		261,000
Contribution margin		87,000
Less: Fixed expenses		96,000
Net operating loss	$	(9,000)

Required:

1. Compute the companys CM ratio and its break-even point in both units and dollars. (Do not round intermediate calculations. Round your "Break-even point in units" answer up to nearest whole number.)

Contribution margin ratio		%
Break-even point in units
Break-even point in dollars

2. The sales manager feels that an $13,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $95,000 increase in monthly sales. If the sales manager is right, what will be the effect on the companys monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

3. Refer to the original data. The president is convinced that a 7% reduction in the selling price, combined with an increase of $25,000 in the monthly advertising budget, will double unit sales. Should the company make these changes?

multiple choice

• Yes

• No

4. Refer to the original data. The companys advertising agency thinks that a new package would help sales. The new package being proposed would increase packaging costs by $0.5 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $5,000? (Do not round intermediate calculations. Round your answer up to nearest whole number.)

unit sales to attain target profit

units

5. Refer to the original data. By automating, the company could slash its variable expenses in half. However, fixed costs would increase by $84,000 per month.

a. Compute the new CM ratio and the new break-even point in both units and dollars. (Do not round intermediate calculations. Round your "Contribution margin ratio" answer to 2 decimal places. Round your "Break-even point" answers up to nearest whole number.)

Contribution margin ratio		%
Break-even point in units
Break-even point in dollars

d. What is the point of indifference between the two options? (Do not round intermediate calculations. Round your answer up to nearest whole number.)

The point of indifference between the two options

Units