Qusetion: 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 (13,400 units × $20 per unit) |
$ |
268,000 |
| Variable expenses |
|
134,000 |
| Contribution margin |
|
134,000 |
| Fixed expenses |
|
149,000
|
| Net operating loss |
$ |
15,000) |
Refer to the original data. By automating, the company could reduce variable expenses in half. However, fixed expenses would increase by $51,000 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 20,100 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.