PROBLEM 529 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety LO54, LO55, LO57, LO58

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

Sales (15,000 units $30 per unit)	$450,000
Variable expenses	315,000
Contribution margin	135,000
Fixed expenses	90,000
Net operating income	$45,000

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.

Required:

1. Prepare two contribution margin format income statement: one showing present operations and one showing what would appear with new equipment Show an amount column, per unit column and a percent column. 2. Using the income statements in #1, compute: 2B break even point in dollar sales 2C margin of safety in dollars and margin of safety percentage 3. Using data in #1, what factor would be paramount in deciding whether to purchase new equipment and Explain why (remember you have to be able to argue your position to non-financial personal) 4. Removing sales commission and replace with Salaries. Using the data in #1, and the marketing manager's assumptions. calculate the new break-even point in dollar sales. Hint: construct a new contribution margin income statement. Explain whether you agree or not with the marketing manager's proposal and why.