Question

Frieden Company's contribution format income statement for last month is shown below: Sales (35,600 units) Variable expenses $789,089 499,000 Contribution margin Fixed expenses 210, seg 168,888 Operating income $ 42,000 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 expense increasing by $210,000 per month. However, variable expenses would decrease by $6 per unit. Selling price would not chang Prepare two contribution format income statements, one showing current operations and one showing how operations would 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 % Proposed Per Unit Amount

Answer 1

Particular	Present			Proposed
	Amount	per unit	%	Amount	per unit	%
Sales	$ 700,000	$ 20	100%	$ 700,000	$ 20	100%
Variable Expense	$ 490,000	$ 14	70%	$ 280,000	$ 8 ($14 - $6)	40%
Contribution	$ 210,000	$ 6	30%	$ 420,000	$ 12	60%
Fixed Expenses	$ 168,000	$ 4.8	24%	$ 378,000	$ 10.8	54%
Operating income	$ 42,000	$ 1.2	6%	$ 42,000	$ 1.2	6%

3) Indifference point = Change in Fixed cost / change in variable expenses

= $ 210,000 / $6 = 35,000 units

Units Sale = 35,000 unis per month

2)

Particular	Present	Proposed
A. Degree of Operating Leverage [Contribution /Operating Income]	$ 210,000/$ 42,000 = 5	$ 420,000/$ 42,000 = 10
B. Break even point in dollars [Fixed Expenses / Contribution %]	$168,000/30% = $ 560,000	$ 378,000 / 60% = $ 630,000
C. Margin of safety in dollars. [Sales - Break even point]	$ 140,000	$ 70,000
D. Margin of safety in percentage terms [C] / Sales	$ 140,000 / $ 700,000 = 20%	$ 70,000 / $ 700,000 =10%

4) Yes

because at current sales level, Freden is in indifference point.

If current level sales increases in future it is better to opt upgrade alternative.

But if current level sales decrease in future it is better to opt present alternative.