Cost/Volume/Profit Analysis

Morton Company's contribution format income statement for last month is given below:

Sales (42,000 units $29 per unit)

Variable expenses

Contribution margin

Fixed expenses

Net operating income

$ 1,218,000

852,600

365,400

292,320

73,080

The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary

considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is

studying ways of improving profits.

Required:

1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable

expenses would be reduced by $8.70 per unit. However, fixed expenses would increase to a total of $657,720 each month. Prepare

two contribution format income statements, one showing present operations and one showing how operations would appear if the

new equipment is purchased.

2. Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of

operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage.

3. Refer again to the data in (1). As a manager, what factor would be paramount in your mind in deciding whether to purchase the new

equipment? (Assume that enough funds are available to make the purchase.)

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company's marketing

strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company

would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would

increase unit sales by 30% without any change in selling price; the company's new monthly fixed expenses would be $545,664; and its

net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing

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Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $8.70 per unit. However, fixed expenses would increase to a total of $657,720 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. (Round "Per Unit" to 2 decimal places.) Show less A Morton Company Contribution Income Statement Present Proposed Amount Per Unit Sales 1,218,000 $ Variable expenses 1,218,000 Contribution margin 0 $ Fixed expenses Net operating income. 0 0.00 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (l.e. .1234 should be entered as 12.34).) Show less A Present Proposed a. Degree of operating leverage b. Break-even point in dollar sales c. Margin of safety in dollars Margin of safety in percentage