Question

Problem 4-27 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO4, LOS, LOO, LOT, LO8] Frieden Company's contribution format income statement for last month is shown below: Sales (30,000 units) Variable expenses $1,050,000 630,000 Contribution margin Fixed expenses 420,000 378,000 Operating income 42.000 bok Ask Competition is intense, and Frieden Company's profits vary considerably from one year to the next. Management is exploring opportunities to increase profitability. Print Required: 1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $420,000 per month. However, variable expenses would decrease by $14 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 Sta Present Proposed Per Unit Amount Per Unit nount 96 Cams canner TERROR

Answer 1

Answer with working notes is given below

Sales Variable expenses Contribution Fixed cost Operating Income FRIEDEN COMPANY Contribution Margin Income Statement Present Proposed Amount per unit % Amount per unit % $1,050,000 $35 100% $1,050,000 $35 100% $630,000 $21 60% $210,000 $7 20% $420,000 $14 40% $840,000 $28 80% $378,000 $798,000 $42,000 $42,000 Present Proposed 10 Degree of Operating Leverage b Break-even point in dollars c Margin of Safety in dollars d Margin of Safety in Percentage $945,000 $105,000 10% $997,500 $52,500 5% working notes: 10 20 Degree of Operating Leverage (Contribution/Operating Income) Contribution Operating Income $420,000 $42,000 $840,000 $42,000 Break even point in dollars Fixed cost Contribution margin % $798,000 $378,000 40% $945,000 45, 800 $997,500 $105,000 $52,500 Margin of Safety in dollars (Total Sales- Break even sales) Total Sales Break even point in dollars $1,050,000 $945,000 $1,050,000 $997,500 10% 59 Margin of Safety in percentage (MOS Sales/Total Sales) 3-a Unit sales 30,000 per month $420,000 Difference in fixed cost Difference in variable cost $147 30,000 3-b Yes 3-c In this case, the indifference point is same as 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 4-a Sales Variable expenses Contribution Fixed cost Operating Income Amount $1,260,000 $756,000 $504,000 $428,000 $76,000 per unit % $35 100% $21 60% $14 40% Operating Income will increase by $34,000 Existing units Increase in sales by 20% 30,000 36,000 4-b Yes Frieden should proceed with the new advertising campaign