Question

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

  

Sales (12,800 units × $20 per unit)	$	256,000
Variable expenses		128,000
Contribution margin		128,000
Fixed expenses		143,000
Net operating loss	$	(15,000)
5. Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $57,000 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. Do not round your intermediate calculations. Round up your final break even answers to the nearest whole number.) b. Assume that the company expects to sell 20,200 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

Answer 1

a

	Contribution margin ratio
Ref	Particulars	Amount
a	Sales revenue	$              20.00
b	Contribution	$              15.00
c=b/a *100	Contribution margin ratio	75.00%

	Break even point
a	Contribution per unit	15.00
b	Fixed costs	200,000
c=b/a	BEP units	13,333.33
d	Selling price	20
e= c*d	BEP sales	$          266,667

b

Particulars	Not automated	Automated
Sales	404,000	404,000
Variable expenses	202,000	101,000
Contribution	202,000	303,000
Fixed expenses	143,000	200,000
Net operating income/ (loss)	59,000	103,000

please rate.