Question 1 Frieden Company's contribution format income statement for last month is shown below: Sales (31,000 units) $ 1,550,000 Variable expenses 1,085,000 Contribution margin 465,000 Fixed expenses 372,000 Operating Income $ 93,000 Competition is intense, and Frieden Company's profits vary considerably from one year to the next. Management is exploring opportunities to increase profitability. Required: 1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $465,000 per month. However, variable expenses would decrease by $15/unit. Selling price would not change. Prepare two contribution format income statements, one showing current operations and one showing how operations would appear if the upgrade is completed. Show an Amount column, a Per Unit column, and a Percentage column on each statement. 2. Refer to the income statements in requirement 1 above. For both current operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollars, and (c) the margin of safety in both dollar and percentage terms. 3. Calculate the unit sales per month at which Frieden management will be indifferent between doing the major upgrade to the manufacturing equipment and not doing the upgrade. Should they do the upgrade if they stay at the current level of sales? 4. Refer to the original data. Instead of doing the major upgrade to the equipment, management is considering introducing a new advertising campaign that will increase fixed expenses by $45,000 per month. Management believes the new advertisements will increase monthly unit sales by 15%. In this case, what would be the impact on operating income? Should they process with the advertising campaign? Question 2 Warm Hands, a small company in Prince Edward Island, manufactures and sells two types of lightweight gloves for runners - Warm and Cozy. Current revenue, cost and unit sales data for the two products appear below: Warm Cozy Selling price per pair $ 8.00 $ 12.00 Variable expenses per pair $ 2.00 $ 6.00 Number of pairs sold monthly 2700 units 900 units Fixed costs are $3,240 per month. Required: 1. Compute the break-even point in units for the company as a whole and for each product. 2. How many pairs of gloves must be sold overall if the company wants to make an after- tax target profit of $8,400 and the tax rate is 30%. Assume that the sales mix remains the same as shown above. 3. The company has developed another type of gloves that provide better protection in extreme cold called Toasty. The company plans to sell Toasty for $20 per pair. They estimate they will sell 900 pairs per month. The variable expense would be $16 per pair. The company's fixed expenses would not change. Compute the new break-even point in sales dollars for the company as a whole
