PROBLEM 5-26 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO4, LO6, L07, L08] Frieden Company's contribution format income statement for the most recent month is given below: Sales (40,000 units). Variable expenses Contribution margin Fixed expenses Net operating income $800,000 560,000 240,000 192,000 $ 48,000 The industry in which Frieden Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic con- ditions. 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 $6 per unit. However, fixed expenses would increase to a total of $432,000 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. Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses. 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 dol- lars, and (c) the margin of safety in both dollar and percentage terms.