Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 6-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO6-4, LO6-5, LO6-7, LO6-8] Morton Company's contribution format income statement for last

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed

Problem 6-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO6-4, LO6-5, LO6-7, LO6-8] Morton Company's contribution format income statement for last month is given below: Sales (47,000 units x $26 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,222,000 855,400 366,600 293,280 $ 73,320 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 $659,880 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. 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 break-even point in dollar sales, and (c) 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 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 $468,026, and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy Complete this question by entering your answers in the tabs below. 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 operations. Variable expenses would be reduced by $7.80 per unit. However, fixed expenses would increase to a total of $659,880 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" to 2 decimal places.) Show less Morton Company Contribution Income Statement Present Proposed Per Unit Amount Per Unit % Amount % % % % % 0 $ 0.00 0 % 0 $ 0.00 0 % $ 0 $ 0 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 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. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places (i.e. 0.1234 should 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. % % Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 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.) Cyclical movements in the economy O Reserves and surplus of the company Performance of peers in the industry Stock level maintained Required 1 Required 2 Required 3 Required 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 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 $468,026; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Show less New break even point in dollar sales

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting For Sustainability

Authors: Gunnar Rimmel

1st Edition

0367478927, 9780367478926

More Books

Students also viewed these Accounting questions

Question

Construct a truth table for the statement. ~(p ~q)

Answered: 1 week ago

Question

What is job enlargement ?

Answered: 1 week ago

Question

what is the most common cause of preterm birth in twin pregnancies?

Answered: 1 week ago

Question

Which diagnostic test is most commonly used to confirm PROM?

Answered: 1 week ago

Question

What is the hallmark clinical feature of a molar pregnancy?

Answered: 1 week ago