Morton Companys contribution format income statement for last month is given below: 
Problem 3-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO 3-4, LO 3-5, LO 3-7, LO 3-8] Morton Company's contribution format income statement for last month is given below: Sales (49,000 units x $25 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $1,225,000 857,500 367,500 294,000 3,500 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 conditions. 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 $7.50 per unit. However, fixed expenses would increase to a total of S661,500 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. Round your "Per unit" answers to 2 decimal places.) Morton Company Contribution Income Statement Present Per Unit Per Unit 25.00 17.50 7.50 25.00 10.00 15.00 ales S 1,225,000S 1001% 40 % 60 % ariable expenses 70 % 857,500 37,500 S 294,000 490,000 735.000S 661,500 Contribution margin 301% ixed expenses et operating income S 73,500 S 73,500 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 30 60 b. The break-even point in dollar sales. Present Proposed Break-even point in dollar sales $ 980,000 $ 1,102,500 C. The margin of safety in both dollar and percentage terms Present Proposed Margin of safety in dollar sales $245,000 $ 122,500 Margin of safety in percentage 2 % 101% 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 enough funds are available to make the purchase.) Performance of peers in the indstry Cyclical movements in the economy Stock level maintained Reserves and surplus of the company 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 without any change in selling price; the company's new monthly fixed expenses would be $367,500, 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 le expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 50% Now break even point in dolar sales
