Question: Due to erratic sales of its sole product a disposable pocket camera Markline Company has been experiencing difficulty for some time. The Company's contribution format income statement for the most recent month is given below:

1. Compute the company's CM ratio and its break-even point in both units and dollars. Explain what CM ratio and break-even means.

2. The President believes that a $20,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in a $90,000 increase in monthly sales. If the president is right, what will be the effect on the company's monthly net operating income or loss? (Use the incremental approach to prepare your answer. Explain how this differs from other approaches.)

3. Refer to the Original data. The sales manager is convinced that a 14% reduction in the selling price, combined with an increase of $65,000 in the monthly advertising budget, will cause unit sales to increase by 100%. What will the new contribution format income statement look like if these changes are adopted? Explain your changes.

4. Refer to the original data. The Marketing Department thinks that a redesigned package for the camera would help sales. The new package would increase packaging cost by $0.75 per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,200?

5. By automating certain operations, the company could reduce variable costs by $2.00 per unit. However, fixed cost would increase by $65,000 each month.

a. Compute the new CM ratio and 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. (Show data on a per unit and percentage basis, as well as in total for each alternative)

c. Would you recommend that the company automates its operations? Explain.