Morton Companys contribution format income statement for last month is given below:

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 $7.80 per unit. However, fixed expenses would increase to a total of $575,640 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.)

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.

b.	The break-even point in dollars sales.

Sales (41,000 units $26 per unit) Variable expenses $1,066,000 746,200 Contribution margin Fixed expenses 319,800 255,840 Net operating income $ 63,960