Question

Morton Company’s contribution format income statement for last month is given below:

Sales (44,000 units × $28 per unit)	$	1,232,000
Variable expenses		862,400
Contribution margin		369,600
Fixed expenses		295,680
Net operating income	$	73,920

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 $8.40 per unit. However, fixed expenses would increase to a total of $665,280 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 your "Per unit" answers to 2 decimal places.)

Morton Company Contribution Income Statement Present Amount Per Unit % Proposed Per Unit Amount % % 1% 0% 0 $ 0.00 0 $ 0.00 0% $ 0

2.Refer to the income statements in (1) above. For both present operations and the proposed new operations, compute

a. The degree of operating leverage.

b. The break-even point in dollar sales.

c. The margin of safety in both dollar and percentage terms.

3. Refer again to the data in (1) above. 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.)

	Stock level maintained
	Performance of peers in the indstry
	Reserves and surplus of the company
	Cyclical movements in the economy

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 50% without any change in selling price; the company’s new monthly fixed expenses would be $369,600, and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy.

new break even point in dollar sales

Answer 1

sales Variable Expenses Contribution Margin Fixed Expense Net Operating Loss Per unit 28.00 19.60 8.40 44000 Units 1232000 862400 369600 295680 73920 Answers Reduce the Varaibe cost by 8.4 Fixed cost Will increase to 665280 Units to be porduced 44000 Motron company Contribution Income Statement Present Proposed Amount Per unit % Amount Per unit sales 1232000 28.00 100% 1232000 28 Variable Expenses 8624001 19.60 70% 492800 11.2 Contribution Margin 369600 8.40 30% 739200 16.8 Fixed Expense 295680 665280 Net Operating Income 739201 73920 % 100% 40% 60%

2) Degree of Operating Leverage = DOL DOL = Contiburion Margin / Net Operating Income Present 5 Prososed 10 Degree of Operating Leverage Times Break Evein Point = Fixed cost / CM Ratio Present Prososed Break Even Point 985600 1108800 Margin of Safety = Actula Sales - BEP Sales Present Prososed Margin of Safety 246400123200 Margin of Safety % 20% 10% 3) What Factor Would you Consider in youy mind to take the Decision Cyclical Movements in the Economy

66000 369600 92400 1848000 1386000 4) Increase Units sales by 50% Monthly Fixed Cost | Operating income Increase by 25% Sales Revneue (Units * Cost) Variable cost = Sales - Fixed cost - Operating Income Contribution Margin CM Ratio = Contibiton Margin Sales / Sales New Break EvenPoint in Dollars = Fixed cost / CM Ratio 462000 25.00% 1478400