**Educational Content: Understanding Contribution Format Income Statements and Break-Even Analysis****Case Study: PEM, Inc. - Financial Challenges**PEM, Inc., a company that produces a high-capacity battery for laptop computers, is facing financial difficulties. Below is the contribution format income statement for the most recent month:| Description | Amount ||-----------------------------------|-------------|| Sales (12,500 units x $20 per unit) | $250,000 || Variable expenses | $150,000 || Contribution margin | $100,000 || Fixed expenses | $112,000 || **Net operating loss** | **$(12,000)**|**Required Tasks:**1. **Compute the Company’s Contribution Margin (CM) Ratio and Break-Even Point:** - Determine the ratio and analyze break-even points both in unit sales and dollar sales. 2. **Effect of Increased Advertising and Sales Efforts:** - Given an increase of $6,800 in the advertising budget, leading to $87,000 more in monthly sales, calculate how this impacts monthly net operating income. 3. **Sales Price and Advertising Adjustments:** - Evaluate the sales manager’s proposal to reduce the selling price by 10% and increase the advertising budget by $31,000, which is expected to double unit sales. Calculate the resulting net operating income or loss. 4. **Impact of New Packaging Costs:** - Assess the Marketing Department’s plan to introduce new packaging that increases costs by $0.60 per unit. Determine how many units need to be sold to achieve a target profit of $4,200. 5. **Automation Considerations:** - An option to automate reduces variable expenses by $3 per unit but increases fixed expenses by $57,000 per month. - a. Calculate the new CM ratio and break-even points both in unit and dollar sales. - b. Project two contribution format income statements with and without automation, assuming sales of 20,400 units next month. - c. Provide a recommendation on whether the company should automate, based on expected sales of 20,400 units.**Graph/Diagram Explanation:**- The table presents key financial figures for PEM, Inc., highlighting sales, expenses, contribution margin, and net operating loss. These figures are critical for performing break-even and profitability analyses.This exercise provides an

CM ratio is computed = CM per unit / Selling price per unitBreakeven units is computed as fixed costs divided by CM per unitIncrease (decrease) in operating income = Increase in contribution margin - Increase in fixed expensesTarget sales unit is computed as Target contribution margin divided by contribution margin per unitSolution 1:Contribution margin$1,00,000.00/Sales units12500Contribution margin per unit$8.00/ Sales price per unit$20.00Contribution Margin ratio40%Fixed costs $1,12,000.00/Contribution Margin per unit$8.00break-even point in units14000Fixed costs $1,12,000.00/Contribution Margin ratio40%break-even point in dollars$2,80,000.00Increase in sales $87,000.00*Contribution Margin ratio40%Increase in Contribution margin$34,800.00Less: Increase in advertising expense$6,800.00Net operating income Increase by =$28,000.00Information:New Sale Price (existing sales price*90%)$18.00New sales units (existing units* 200%)25000New Fixed costs (Existing cost+ 31000)$1,43,000.00Variable cost per unit $12.00PEM, Inc..Contribution Income statementSales (New units *New Price)$4,50,000.00Less: variable costs $3,00,000.00Contribution margin$1,50,000.00Less: New Fixed costs$1,43,000.00Net Operating income$7,000.00Fixed costs $1,12,000.00Add: Target Profit$4,200.00Total Amount to be earned $1,16,200.00/New Contribution Margin per unit (Existing - $0.60)$7.40Sales units to earn target income15703Solution 5-a:Contribution margin (existing + $3)$11.00/ Sales price per unit$20.00New Contribution Margin ratio55.00%New Fixed costs (Existing + Increase)$1,69,000.00/Contribution Margin per unit$11.00break-even point in units15364Fixed costs $1,69,000.00/Contribution Margin ratio55%break-even point in dollars$3,07,273Solution 5-b:PEM, Inc.Contribution income statement Not automatedAutomatedTotal Per unit%TotalPer unit%Units2040020400Sales$4,08,000$20$4,08,000$20Variable costs$2,44,800$12$1,83,600$9Contribution margin$1,63,200$8$2,24,400$11Fixed costs$1,12,000$1,69,000Net operating income$51,200$55,400Solution 5-c:Should the company automate its operations?Yes(Because Net operating income increased)Summary of final answers for requirement 1 to 5 is as under: Summary of final answers:1CM ratio40%Break even units14000Breakeven sales$2,80,0002Net operating income Increase by =$28,0003Net Operating income$7,0004Sales units to earn target income157035aCM ratio55%Break even units15364Breakeven sales3072735bnet operating income (Operations are not automated)$51,200Net operating income (Operations are automated)$55,4005cShould the company automate its operations?Yes

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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 (12,500 units x $20 per unit) Variable expenses Contribution margin Fixed expenses Net operating loss $ 250,000 150,000 100,000 112,000 $ (12,000) Required: 1. Compute the company's CM ratio and its break-even point in unit sales and dollar sales. 2. The president believes that a $6,800 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $87,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company's monthly net operating income? 3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $31,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)? 4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by $0.60 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,200? 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $57,000 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 20,400 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 20,400)?