Due to erratic sales of its sole product- a disposable pocket camera - Markline Compnay has been experiencing difficulty for some time. The company's contribution format income statement for the most recent month is given below.
Sales (30,000 units X $20.00 per unit).................... $600.000
Variable expenses (12.00).................................. (360.000)
Contribution margin.......................................... 240,000
Fixed expenses................................................ (250,000)
Net operating loss............................................. $(10,000)
5. Refer to the original data (data provided in the above paragraph and the five numbers above). By automating certain operations, the company could reduce variable costs by $2.00 per unit. However, fixed costs would increase by $65,000 each month.
a.) Compute the new CM ratio and the new break-even point in both units and dollars.
b.) Assume that the company expects to sell 40,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.
c.) Would you recommend that the company automate its operations? Explain.