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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 companys contribution format income statement for the most recent month is given below: Sales (19,500 units x $30 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $585,000 409,500 175, 500 180,000 $ (4,500)1. Compute the companys 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 companys 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. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data ona 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?

Per Unit Per Unit Total Total 30 18 12 30 % $ 780,000 $ 30 Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 780,00$ 30 21 234,000 $9 18 468,000 312,000$12 252,000 546,000 21 252,000 $ (18,000) $ 60,000

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Sales Variable expenses Contribution margin Fixed expenses Net operating income Total 780000 546000 234000 180000 54000 Per Unit 30.00 21.00 9.00 Total 780000 468000 312000 252000 60000 Per Unit 30.00 18.00 12.00 100% T% 30% 100% 60% 40%

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