Frieden Company's contribution format income statement for last month is shown below:

Competition is intense, and Frieden Company's profits vary considerably from one year to the next. Management is exploring opportunities to increase profitability.

Required:
1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $240,000 per month. However, variable expenses would decrease by $6 per unit. Selling price would not change. Prepare two contribution format income statements, one showing current operations and one showing how operations would appear if the upgrade is completed. Show an Amount column, a Per Unit column, and a Percentage column on each statement. Do not show percentages for the fixed expenses. 

2. Refer to the income statements in (I) above. For both current operations and the proposed new operations, compute 

(a) The degree of operating leverage.

(b) The break-even point in dollars.

(c) The margin of safety in both dollar and percentage terms.

3. Calculate the unit sales per month at which Frieden management will be indifferent between doing the major upgrade to the manufacturing equipment and not doing the upgrade. Based on this analysis, should Frieden proceed with the major upgrade? Why or why not? 

4. Refer to the original data. Instead of doing the major upgrade to the equipment, management is considering introducing a new advertising campaign that will increase fixed expenses by $20,000 per month. Management believes the new advertisements will increase monthly unit sales by 10%. Should Frieden proceed with the new advertising campaign?

Transcribed Image Text:

Sales (40,000 units) $800,000 Variable expenses. 560,000 240,000 Contribution margin. Fixed expenses Operating income. 192,000 $ 48,000