Question

Due to erratic sales of its sole product, PEM Inc. has been experiencing financial difficulties. Its most recent financial information includes the following:

            Sales                                        $396,000         (13,200 units x $30 per unit)

            Variable expenses                   198,000

            Fixed expenses                        220,500

            Net operating income              (22,500)

By further automation, the company could reduce variable expenses by $4 per unit. However, fixed expenses would increase by $25,000. What would its new net operating income be as a result of this initiative if nothing else changes?

Answer 1

PEM Inc
Comparative income statement
	Present		Proposed
	13200	Units	13200	Units
	Total	Per unit	Total	Per unit
Sales	$ 396,000.00	$   30.00	$   396,000.00	$ 30.00
Variable expenses	$ 198,000.00	$   15.00	$   145,200.00	$ 11.00
Contribution margin	$ 198,000.00	$ 15.00	$   250,800.00	$ 19.00
Fixed expenses	$ 220,500.00		$   245,500.00
Net operating income	$ (22,500.00)		$       5,300.00

New operating income =$5300

New operating income is a profit instead of loss in current period