Frieden Company's contribution format income statement for the most recent month is given below:

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

The industry in which Frieden 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 on the market that would allow Frieden Company to automate a portion of its operations. Variable expenses would be reduced by $6 per unit. However, fixed expenses would increase to a total of $432,000 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. (Input all amounts as positive values except losses which should be indicated by minus sign.)

Present

Proposed

	Amount	Per Unit	%	Amount	Per Unit	%
(Click to select)Variable expensesFixed expensesSalesNet operating income (loss)Contribution margin	$	$	%	$	$	%
(Click to select)Net operating income (loss)Contribution marginFixed expensesVariable expensesSales
(Click to select)SalesContribution marginNet operating income (loss)Fixed expensesVariable expenses		$	%		$	%
(Click to select)Net operating income (loss)Variable expensesSalesFixed expensesContribution margin
(Click to select)Fixed expensesNet operating income (loss)Contribution marginVariable expensesSales	$			$

2.	Refer to the income statements in (1) above. For both present operations and the proposed new operations, Compute:

a.	The degree of operating leverage.

	Present	Proposed
Degree of operating leverage

b.	The break-even point in dollars.

	Present	Proposed
Break-even point in dollars	$	$

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

	Present	Proposed
Margin of safety in dollars	$	$
Margin of safety in percentage	%	%

3.

Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that ample funds are available to make the purchase.)

	Cyclical movements in the economy
	Reserves and surplus of the company
	Performance of peers in the indstry
	Stock level maintained

4.

Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the companys marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company invest heavily in advertising. The marketing manager claims that this new approach would increase unit sales by 50% without any change in selling price; the companys new monthly fixed expenses would be $240,000; and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy.

New break even point in dollar sales

$