Mh2Q14

Frieden Company's contribution format income statement for the most recent month is given below: 14 Sales (42,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $1,260,000 882,000 378,000 302,400 $ 75,600 8 0157:48 eBook The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably om 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 $9.00 per unit. However, fixed expenses would increase to a total of $680,400 each month. Prepare two contribution format income statements: one showing present operations, and one showing how operations would appear if the new equipment were purchased. (Input all amounts as positive values except losses which should be indicated by minus sign. Round your "Per unit" answers to 2 decimal places.) Present Proposed Per Unit Amount Per Unit Amount Percentage % % Percentage % % % % MC 14 2. Refer to the income statements in Requirement (1) above. For both present operations and the proposed new operations, Compute: a. The degree of operating leverage. Present Proposed Degree of operating leverage 8 01:57:09 eBook b. The break-even point in dollars. Present Proposed Dollar sales to breakeven c. The margin of safety in both dollar and percentage terms. Present Proposed Margin of safety in dollars Margin of safety in percentage % % Margin of safety in percentage % % 14 8 01:56:49 3. Refer again to the data in Requirement (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.) eBook O Reserves and surplus of the company Oyclical movements in the economy O Stock level maintained O Performance of peers in the industry 4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company's 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 50% without any change in selling price; the company's new monthly fixed expenses would be $378,000; 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. Do you agree with the marketing manager's proposal? New break even point in dollar sales Frieden Company's contribution format income statement for the most recent month is given below: 14 Sales (42,000 units) Variable expenses Contribution margin Fixed expenses Net operating income $1,260,000 882,000 378,000 302,400 $ 75,600 8 0157:48 eBook The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably om 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 $9.00 per unit. However, fixed expenses would increase to a total of $680,400 each month. Prepare two contribution format income statements: one showing present operations, and one showing how operations would appear if the new equipment were purchased. (Input all amounts as positive values except losses which should be indicated by minus sign. Round your "Per unit" answers to 2 decimal places.) Present Proposed Per Unit Amount Per Unit Amount Percentage % % Percentage % % % % MC 14 2. Refer to the income statements in Requirement (1) above. For both present operations and the proposed new operations, Compute: a. The degree of operating leverage. Present Proposed Degree of operating leverage 8 01:57:09 eBook b. The break-even point in dollars. Present Proposed Dollar sales to breakeven c. The margin of safety in both dollar and percentage terms. Present Proposed Margin of safety in dollars Margin of safety in percentage % % Margin of safety in percentage % % 14 8 01:56:49 3. Refer again to the data in Requirement (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.) eBook O Reserves and surplus of the company Oyclical movements in the economy O Stock level maintained O Performance of peers in the industry 4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company's 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 50% without any change in selling price; the company's new monthly fixed expenses would be $378,000; 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. Do you agree with the marketing manager's proposal? New break even point in dollar sales