Question

Yu Lilly LUSL JUULLUICUI CALVCI Alaly SS. Upelny Levelay Ilal y Safety (LO2-4, LO2-5, LO2-7, LO2-8) Morton Company's contribution format Income statement for last month is given below: $1.215.000 Sales (45,000 units * $27 per unit) Variable expenses Contribution margin Fixed expenses Net operating income 850, 500 364.500 291,600 72,900 $ 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 $8.10 per unit. However, fixed expenses would increase to a total of $656,100 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 (U). 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 $623.295, 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 Required Required Required 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 $8.10 per unit. However, fixed expenses would increase to a total of $656,100 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 Amount Per Unit Amount Per Unit % < Required 1 Required 2 >

Answer 1

sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss Per unit 27.00 18.90 8.10 45000 Units 1215000 850500 364500 291600 72900 Answers Reduce the Varaibe cost by 8.10 – Fixed cost Will increase to 656100 Units to be porduced 45000 Motron company Contribution Income Statement Present Proposed Amount Per unit % Amount Per unit sales 1215000 27.00 100% 1215000 27 Variable Expenses 850500 18.901 70% 486000 10.8 Contribution Margin 364500 8.10 30% 729000 16.2 Fixed Expense 291600 656100 Net Operating Income 72900 72900 % 100% 40% 60%

2) JA Degree of Operating Leverage = DOL DOL = Contiburion Margin / Net Operating Income Present Prososed Degree of Operating Leverage 5 10 Break Evein Point = Fixed cost / CM Ratio Present Prososed Break Even Point 972000 1093500 Times Margin of Safety = Actula Sales - BEP Sales Present Prososed Margin of Safety 243000 121500 Margin of Safety % 20% 10% 3) What Factor Would you Consider in youy mind to take the Decision Cyclical Movements in the Economy 4) Increase Units sales by 30% 58500 Monthly Fixed Cost 623295 Operating income Increase by 20% 87480 Sales Revneue (Units Cost) 1579500 Variable cost = Sales - Fixed cost - Operating 868725 Income Contribution Margin 710775 CM Ratio = Contibiton Margin Sales / Sales 45.00% New Break EvenPoint in Dollars 1385100 = Fixed cost / CM Ratio