Cost-Volume-Profit Relationships Required: 1. Prepare contribution format income statements for April and May. Use the following headingx Standard Deluxe Total Amount Percent Amount Percent Amount Percent Sales Etc. Place the fixed expenses cely in the Total column. Do not show percentages for the fixed expenses. 2. Explain the difference in net operating incomes between the two months, even though the same total number of sets was sold in each month 3. What can be done to the sales commissions to improve the sales mix? a. Using April's sales mix, what is the break-even point in dollar sales? b. Without doing any calculations, explain whether the break-even point in May would be higher or lower than the break-even point in April. Why? PROBLEM 5-29 Changes in Cost Structure; Break Even Analysis: Operating Leverage: Margin of Safety LOS-4, LOS-S. LOS-7. LOS- Morton Company's contribution format income statement for last month is given below: Sales (15,000 units X $30 per unit) Variable expenses Contribution margin Fed expenses Net operating income $450,000 315.000 135,000 90,000 $ 45,000 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 con ditions. 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 S9 per unit. However, fixed expenses would increase to a total of $225,000 each month. Prepare two contribution format income statements, one showing present operations and one showing how opera- tions would appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and a Percent column on cach statement. Do not show percentages for the fixed expenses. 2. Refer to the income statements in (1). For the present operations and the proposed new opera tions, 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 man ager 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 S180,000, and its net operating income would increase by 20%. Compute the company's break-even point in dol- lar sales under the new marketing strategy. Do you agree with the marketing manager's proposal Cost-Volume-Profit Relationships Required: 1. Prepare contribution format income statements for April and May. Use the following headingx Standard Deluxe Total Amount Percent Amount Percent Amount Percent Sales Etc. Place the fixed expenses cely in the Total column. Do not show percentages for the fixed expenses. 2. Explain the difference in net operating incomes between the two months, even though the same total number of sets was sold in each month 3. What can be done to the sales commissions to improve the sales mix? a. Using April's sales mix, what is the break-even point in dollar sales? b. Without doing any calculations, explain whether the break-even point in May would be higher or lower than the break-even point in April. Why? PROBLEM 5-29 Changes in Cost Structure; Break Even Analysis: Operating Leverage: Margin of Safety LOS-4, LOS-S. LOS-7. LOS- Morton Company's contribution format income statement for last month is given below: Sales (15,000 units X $30 per unit) Variable expenses Contribution margin Fed expenses Net operating income $450,000 315.000 135,000 90,000 $ 45,000 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 con ditions. 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 S9 per unit. However, fixed expenses would increase to a total of $225,000 each month. Prepare two contribution format income statements, one showing present operations and one showing how opera- tions would appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and a Percent column on cach statement. Do not show percentages for the fixed expenses. 2. Refer to the income statements in (1). For the present operations and the proposed new opera tions, 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 man ager 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 S180,000, and its net operating income would increase by 20%. Compute the company's break-even point in dol- lar sales under the new marketing strategy. Do you agree with the marketing manager's proposal