Problem $5-29($Algo$)$ Changes in Cost Structure; Break$-$Even Analysis; Operating Leverage; Margin of

Safety LO$5-4,$ LO$5-5,$ LO$5-7,$ LO$5-8]$

Morton Company's 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:

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 $$7\mathrm{.}50$ per unit. However, fixed expenses would increase to a total of $$661,500$ 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.

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.

Refer again to the data in $(1).$ 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.$)$

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 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 company's new monthly fixed expenses would be $$469,175$; and its

net operating income would increase by $20\%.$ Compute the company's break$-$even point in dollar sales under the new marketing

strategy.

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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 $$7\mathrm{.}50$ per unit. However, fixed expenses would increase to a total of $$661,500$ 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 "Per Unit"