Problem 6-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure (LO6-1, LO6-3, LO6-4, LO6-5, LO6-6] Due to erratic sales of its sole product-a high-capacity battery for laptop computers--PEM, Inc., has been experiencing financial difficulty for some time. The company's contribution format income statement for the most recent month is given below: Sales (19,500 units * $38 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 585, eee 489,500 175,500 180,000 $ (4,500) Required: 1. Compute the company's CM ratio and its break-even point in 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 increase (decrease in the company's monthly net operating income? 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. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow 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 attain a target 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 unit sales and dollar sales. b. Assume that the company expects to sell 26,000 units next month. Crepare 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 (Assuming that the company expects to sell 26,000)? Exercise 6A-1 High-Low Method (L06-10) The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer. Month January February March April May June July August September October November December Occupancy-Days 1,736 1,904 2,356 960 360 744 2,188 2,406 840 124 720 1,364 Electrical Costs $ 4,127 $ 4,207 $ 5,883 $ 2,857 $ 1,871 $ 2,696 $ 4,670 $ 5,148 $ 2,691 $ 1,588 $ 2,454 $ 3,529 Required: 1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. (Do not round your intermediate calculations. Round your Variable cost answer to 2 decimal places and Fixed cost element answer to nearest whole dollar amount.) Variable cost of electricity Fixed cost of electricity per occupancy-day per month 4 Required: 1. Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. (Do not round your intermediate calculations. Round your Variable cost answer to 2 decimal places and Fixed cost element answer to nearest whdle dollar amount.) ts Variable cost of electricity Fixed cost of electricity per occupancy-day per month eBook Hini ferences 2. What other factors in addition to occupancy-days are likely to affect the variation in electrical costs from month to month? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.) ? Seasonal factors like winter or summer. 2 Systematic factors like guests, switching off fans and lights. ? Number of days present in a month. ? Fixed salary paid to hotel receptionist. ? Income taxes paid on hotel income. be