Lawson Manufacturing Company's (LMC) contribution format income statement for the most recent month is

given below:

Sales 450 000 CAD

Variables expenses 315 000 CAD

Contribution Margin 135 000 CAD

Fixed Expenses 90 000 CAD

Operating Income 45 000 CAD

LMC's operating income is highly sensitive to changes in the operating environment, and management is

considering ways to stabilize earnings and improve profitability.

Required:

1. New equipment has come on the market that would allow LMC to automate a portion of its operations.

Variable costs would be reduced by $9 per unit. However, fixed costs would increase to a total of $225,000 each

month. Prepare two contribution format income statements, one showing current operations and one showing

how operations would appear if the new equipment is purchased. Show an Amount column, a Per Unit column,

and a Percentage column on each statement. Do not show percentages for the fixed costs.

2. Refer to the income statements in (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 () the margin of safety in

both dollar and percentage terms.

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? (You may assume that ample funds are available to make the

purchase.)

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 salespeople 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

30% without any change in selling price, the companys new monthly fixed expenses would be $180,000, and its

operating income would increase by 20%. Compute the break-even point in dollar sales for the company under

the new marketing strategy. Do you agree with the marketing manager's proposal?

5. What level of sales under the new marketing strategy would generate the same operating income as the most

recent month?