Question

Frieden Company's contribution format income statement for last month is shown below: Sales (43,000 units) Variable expenses $1,075,000 645,000 Contribution margin Fixed expenses 430,000 387,000 Operating income 43,000 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 $430,000 per month. However, variable expenses would decrease by $10 per 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. FRIEDEN COMPANY Contribution Margin Income Statement Present Amount Per Unit % Amount Proposed Per Unit % CS Scanned with CamScanner 0 So 0050

Answer 1

Requirement (1)

FRIEDEN Company
Contribution Margin Income Statement
	Present			Proposed
	Amount	Per Unit	%	Amount	Per Unit	%
Sales	1075000	25		1075000	25
Less: Variable Cost	645000	15		215000	5
Contribution	430000	10	40%	860000	20	80%
Less: Fixed Cost	387000			817000
Income	43000			43000

Requirement (2)

	Present	Proposed
Contribution	430000	860000
Income	43000	43000
Degree of Operating Leverage (Contribution / Income)	10	20
Fixed Cost	387000	817000
Contribution Margin Ratio (CMR)	40%	80%
Break Even Point in Dollars (Fixed Cost / CMR)	967500	1021250
Sales in Dollars	1075000	1075000
Break Even Point in Dollars	967500	1021250
Margin of Safety in Dollars (Sales - Break Even point)	107500	53750
Margin of Safety in % (Margin of Safety in Dollars / Sales)	10%	5%

Requirement (3a)

As from requirement (1) it is clear that the profits under both the present and proposed, remain the same at the current level of sale. Therefore, the point of indifference is the current sales level. That is 43000 units

Requirement (3b)

Yes

Requirement (3c)

In this case, the current indifference point "is" the current level of sales at which point the upgrade "will" have an impact on the operating income. So FRIEDEN's "should" proceed to upgrade.