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 (44,000 units * $25 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $1,100,000 770,000 330,000 264,000 $ 66,000 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. 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 $7.50 per unit. However, fixed expenses would increase to a total of $594,000 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. 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 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 expen by $7.50 per unit. However, fixed expenses would increase to a total of $594,000 each month. Prepare two contribution format incon showing present operations and one showing how operations would appear if the new equipment is purchased. (Round "Per Unit" to a % Morton Company Contribution Income Statement Present Proposed Amount Per Unit % Amount Per Unit $ 1,100,000 $ 25.00 100 %$ 1.100,000 $ 25.00 770,000 17.50 70 % 44.000 10.00 330,000 $ 7.50 30 % 1,056,000 $ 15.00 264,000 594 000 S 66,000 $ 462.000 100% Sales Nariable expenses Contribution margin Fixed expenses Net operating income 40 % 60 % Required 2 > 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 * Degree of operating leverage Break-even point in dollar sales Margin of safety in dollars Margin of safety in percentage $ $ 880.000 572.000 52 001 Proposed 10 $ 3.712.500 $ 528.000 48.00% 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 Reserves and surplus of the company O Performance of peers in the industry Stock level maintained Complete this question by entering your answers in the tabs below. 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 $421,300; 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 A New break even point in dollar sales