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 (13,100 units × $20 per unit)$262,000 Variable expenses 131,000 Contribution margin 131,000 Fixed expenses 146,000 Net operating loss$(15,000)

Required:

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $30,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $53,000 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 20,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data 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 20,000)?

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