Problem 5-29 Changes in Cost Structure; Break-Even Analysis: Operating Leverage; Margin of Safety [LO5-4, LO5-5, LO5-7, LO5-8] Morton Company's contribution format income statement for last month is given below $ Sales (41,600 units x 524 per unit) Variable expenses Contribution margin Fixed expenses Net operating income 984,000 688,800 295,200 236, 160 59,040 $ 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 $720 per unit. However , fixed expenses would increase to a total of $531,360 each month Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the now equipment is purchased 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 brook even point in dollar sales, and to the margin of safety in dollars and the margin of safety percentage 3. 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) 4 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 poy 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 in sales by 30% without any change in selling price the company's new monthly fixed expenses would be $440,832, and its net operating income would increase by 20% Compute the company's break-even point in dollar sales under the new marketing strategy SA Nav Required 1 Required 2 Required 3 Required 4 New equipment has come onto the market that would allow Morton Company to automate a portion of its expenses would be reduced by $7.20 per unit. However, fixed expenses would increase to a total of $531 Prepare two contribution format income statements, one showing present operations and one showing ho appear if the new equipment is purchased. (Round "Per Unit" to 2 decimal places.) Morton Company Contribution Income Statement Present Proposed Amount Per Unit Per Unit Amount 984,000 688,800 295 200 236,160 S 59,040 0.00 0$ Sales Variable expenses Contribution margin Fixed expenses Net operating income 0.00 S Required 2 > Required 1 Required 2 Required 3 Required 4 Refer to the income statements in (1). For the present operations and the pr of operating leverage, (b) the break-even point in dollar sales, and (c) the m percentage. (Do not round intermediate calculations. Round your percentage be entered as 12.34).) Present Proposed a b Degree of operating leverage Break even point in dollar sales Margin of safety in dollars Margin of safety in percentage C % % the new equipment? (Assume that enough OCyclical movements in the economy OReserves and surplus of the company Performance of peers in the industry O Stock level maintained New break even point in dollar sales Pour