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 (12,900 units × $20 per unit)	$	258,000
Variable expenses		129,000
Contribution margin		129,000
Fixed expenses		144,000
Net operating loss	$	(15,000)

  

Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by $0.50 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $4,200? (Do not round intermediate calculations and round your final answer to the nearest whole number.) Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $58,000 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 20,900 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

Answer 1