Top of Form

value: 5.00 points

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 (12,700 units $40 per unit)	$	508,000
Variable expenses		254,000
Contribution margin		254,000
Fixed expenses		284,000
Net operating loss	$	(30,000)

5.	Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $56,000 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. Round your final 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 20,500 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				%				%
Variable expenses				%				%
Contribution margin				%				%
Fixed expenses
Net operating income

c.

Would you recommend that the company automate its operations?

	Yes
	No