Problem - 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:
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Sales (19,500 units at $30 per unit)
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$585,000
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Variable expenses
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409,500
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Contribution margin
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175,500
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Fixed expenses
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180,000
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Net operating loss
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$(4,500)
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Requirement 1: Compute the company's CM ratio and its break-even point in both units and dollars.
Requirement 2: The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, by how much will the company's net operating income increase or decrease?
Requirement 3: Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will cause unit sales to double. What will the new contribution format income statement look like if these changes are adopted?