Morton Company\'s contribution format income statement for last month is given b

Question

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

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.

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 $8.10 per unit. However, fixed expenses would increase to a total of $597,780 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.)

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.

Sales (41,000 units × $27 per unit) $1,107,000 774,900 Variable expenses Fixed expenses Net operating income 332,100 265,680 $ 66,420

Explanation / Answer

1. Income statements

2. a. Operating leverage = Net operating income/Contribution

Present = 66420/332100 = 0.20

Prposed = 66420/664200 = 0.10

b. Break even posint in dollars sales = Fixed cost/contribution margin ratio

c. Margin of safety = sales - Breakeven point

3. Performance of peers will be the cricial factor in determining whether to purchase new equipment or not.

Present Proposed Sales 1107000 1107000 Less: Variable cpost 774900 442800 Contirbution 332100 664200 Less: Fixed cost 265680 597780 Net operating income 66420 66420

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