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

Sales (30,000 units) $1,200,000 Variable expenses 900,000 Contribution margin 300,000

Fixed expenses 240,000

Operating income. $60,000

1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $300,000 per month. However, variable expenses would decrease by $10 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.

2. Refer to the income statements in requirement 1 above. For both current operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollars, and (c) the margin of safety in both dollar and percentage terms.

		present	proposed
a	degree of operating leverage
b	Break-even pont in dollars
c	Margin of safety in dollars
	Margin of safety in %

3-a. 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.

per sales

?

unit

3-b. Based on the above analysis, should Frieden proceed with the major upgrade?

a) Yes

b) no

3-c. Why or why not?

In this case the indifference point		the current level
of sale at which point the upgrade		have an impact on
the operate income So Friden's		proceed to upgrade