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

ID: 2538012 • Letter: M

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.

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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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).)

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.)

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.)

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

Explanation / Answer

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

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

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

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.

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

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