Question

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

Sales (43,000 units × $25 per unit)	$	1,075,000
Variable expenses		752,500
Contribution margin		322,500
Fixed expenses		258,000
Net operating income	$	64,500

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 $7.50 per unit. However, fixed expenses would increase to a total of $580,500 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 (1). 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 $271,975; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

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 $7.50 per unit. However, fixed expenses would increase to a total of $580,500 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.)

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NOT SURE IF I AM ON THE RIGHT TRACK

	Morton Company Contribution Income Statement Present Proposed Amount Per Unit % Amount Per Unit % Sales $1,075,000 $22.00 100 % $1,075,000 $22.00 100 % Variable expenses 752,500 17.00 18 % % Contribution margin 322,500 $5.00 82 % 1,075,000 $22.00 100 % Fixed expenses 258,000 Net operating income $64,500 $1,075,000

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. (Round your percentage answers to 2 decimal places (i.e. .1234 should be entered as 12.34).)

Present Proposed a. Degree of operating leverage b. Break-even point in dollar sales c. Margin of safety in dollar

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

	Cyclical movements in the economyradio button unchecked1 of 4 Reserves and surplus of the companyradio button unchecked2 of 4 Performance of peers in the industryradio button unchecked3 of 4 Stock level maintainedradio button unchecked4 of 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 $271,975; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy. (Round your answer to the nearest whole dollar amount.)

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	New break even point in dollar sales

Answer 1

Solution:

Part 1 --- Contribution Income Statement (Present and Proposed Condition)

Morton Company
Contribution Income Statement
	Present			Proposed
	Amount	Per Unit	%	Amount	Per Unit	%
Sales	$1,075,000	$25.00	100%	$1,075,000	$25	100%
Variable Expenses	$752,500	$17.50	70% (17.50/25*100)	$430,000	$10 (17.50-7.5)	40% (10/25*100)
Contribution Margin	$322,500	$7.50	30% (7.5/25*100)	$645,000	$15	60% (15/25*100)
Fixed Expenses	$258,000			$580,500
Net Operating Income	$64,500			$64,500

Note---

1) Sales always taken as 100%

2) Proposed Variable Expenses per unit = Present $17.50 - $7.50 reduced = $10 per unit. Hence the proposed variable expenses = 43,000 Units x $10 = $430,000

Part 2(a)(b) and (c )

	Present	Proposed
a) Degree of Operating Leverage
Contribution Margin	$322,500	$645,000
Net Operating Income	$64,500	$64,500
Degree of Operating Leverage (Contribution Margin / Net Operating Income)	5.00 (322500 / 64500)	10.00 (645,000 / 64,500)
b) Break Even Point in dollar sales
Total Fixed Expenses	$258,000	$580,500
Contribution Margin Ratio	30%	60%
Break Even Point in dollars (Total Fixed Expenses / Contribution Margin Ratio)	$860,000 (258,000 / 30%)	$967,500 (580,500 / 60%)
c) Margin of Safety in dollars and in Percentage
Total Sales	$1,075,000	$1,075,000
Break Even Sales in dollars (as calculated in part b)	$860,000	$967,500
Margin of safety in dollars (Sales - Break Even Sales)	$215,000	$107,500
Margin of Safety in percentage (Margin of Safety in dollars / Sales x 100)	20.00%	10.00%

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.