PROBLEM 522 Basics of CVP Analysis; Cost Structure [LO1, LO3,LO4, LO5, LO6]

Due to erratic sales of its sole producta high-capacity battery for laptop computersPEM, Inc., has been experiencing difficulty for some time. The company's contribution format income statement for the most recent month is given below:

Sales (19500 units x $30 per unit) $ 585,000 Variable expenses 409,500 Contribution Margin 175,500 Fixed expenses 180,000 Net operating loss $ (4500) 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. Would you recommend that the company automate its operations? Explain.