Morton Company\'s contr bution tormet Income statement for last month is given S

Question

Morton Company's contr bution tormet Income statement for last month is given Sales (43,00 units528 per unit) arlsble expenses Contribution margin Fixed expenses 253 260 Net operating income The industry in which Morton Compeny operates is quite sensitive to cyclicel movements in the economy. Thus, profts very considerably from year to year according to general economic condtions. The company has& large amount of unused copacity and it studying ways of improving profes Required: 1. New equipment has come onto the market that would allow Morton Company to automate e portion of Its operetions. Veriable expenses would be reduced by $8.40 per unit However,fixed expenses would increase to a sotal of $650,160 each month Prepare two contribution formet income statements, one showing present operetions and one showing how operations would appeer if the new equipment is purchased 2 Refer to the income statements in () For the present operations and the proposed new operations, compute (aj the degree of operating leverege, (bj the bresk-even point in dollar seles, and (C) the margin of safety in doliars and the margin of sofety percemage Refer egain to the data in , As manage, what factor would be paramountin your mind in deciding whether 10 purchase the new equipment? (Assume thet enough funds are evaileble to make the purchase) Refer to the original dets.Rather then purchase new equipment, the marketing mansger argues thet the company's markeing would pay solespersons fixed salaries and would invest heavily in advertising The marketing manager claims this new approach would increase un, sales by 30% without any ehangem selling price, the company's new monthly 6xed e·penses would be $304.612 and 1s net operaeng income would increase by 20% Compute the company's break-even point in dolar sales under the new marketing strenegy Complete this question by entering your answers in the tabs below. Required Required 2 Required 3 Required 4 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, fxed expenses would increase to a total of $650,160 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 lessa Contribution Income Statement Proposed 1,200 operating income

Explanation / Answer

Requirement 1 New Equipment has come onto the market that would allow Morton company to automate a portion of its operation, variable expenses would be reduced by $ 8.40 per unit. However, fixed expenses would increase to a total of $ 650.160 each month. Prepare two contribution format income statements, one showing present obligations and one showing how operations would appear if the new equipment is purchased Morton Company Contribution Income Statement Present Proposed Amount Per Unit % Amount Per unit % Sales $1,204,000 $28 100.00% $1,204,000 $28 100.00% Variable Expenses $842,800 $20 70.00% $361,200 $8.40 30.00% Contribution Margin $361,200 $8 30.00% $842,800 $19.60 70.00% Fixed Expenses $288,960 $650,160 Net Operating Income $72,240 $192,640 Requirement 2 Refer to the income statements in 1, for the present operations and the proposed new operations, compute a The degree of operating leverage Present Proposed Degree of operating margin = Contribution margin/Net Operating Income $361200/$72240 $842800/$192640 5 4.375 b the break even point in dollar sales Present Proposed Break Even Point = Fixed Expenses/Contribution Margin Ratio $288960/30% $650160/70% 963200 928800 Break Even point in Dollars $963,200 $928,800 c the margin of safety in dollars and the margin of safety percentage Present Proposed Margin of safety in dollars = Actual Sales - Breakeven Sales 1204000-963200 1204000-928800 $240,800 $275,200 Margin of safety in percentage = Margin of safety in dollars/Actual Sales $240800/1204000 $275200/1204000 20.00% 22.86% Requirement 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) Due to the purchase of new equipment, the company's contribution margin has increased. The important factor to be considered here would be the sensitivity of the company's operations that is the no of unit sold. The company would be in better position if there is an increase in sales and would be worse position if the sales drop due to the fixed cost element Requirement 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 salesperson 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 $ 304612 and its net operating income would increase by 20%. Compute the company's breakeven point in dollars under the new marketing strategy Here we will first have to calculate the new variable cost to calculate the contribution margin and ultimately calculate the break even sales Profit = (Sales - Variable expenses) - Fixed expenses 86688 = ( 1565200 - Variable expenses) - 304612 86688 + 304612 = 1565200 - variable expenses Variable expenses = 1565200 - 391300 Variable Expenses = $1173900 Sales 43000*130% 55900 Sales in dollar terms 55900*28 1565200 Net Operating Income - Present*120% $72240*120% 86688 Sales $1,565,200 $28 100% Less : Variable Expenses $1,173,900 $21 75.00% Contribution Margin $391,300 $7 25.00% Fixed Expenses $304,612 Break Even Sales in Dollars $304612/25% 1218448 Break Even sales in dollars under new marketing strategy is $ 1218448

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