Question
Morton Companys contribution format income statement for last month is given below: Sales (50,000 units $28 per unit) $ 1,400,000 Variable expenses 980,000 Contribution margin
Morton Companys contribution format income statement for last month is given below:
Sales (50,000 units $28 per unit) | $ | 1,400,000 | |
Variable expenses | 980,000 | ||
Contribution margin | 420,000 | ||
Fixed expenses | 336,000 | ||
Net operating income | $ | 84,000 | |
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.
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 $8.40 per unit. However, fixed expenses would increase to a total of $756,000 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. (Round "Per Unit" to 2 decimal places.)
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2) Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e. .1234 should be entered as 12.34).)
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3)Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the companys marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable 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 30% without any change in selling price; the companys new monthly fixed expenses would be $536,200; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)
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