Morton Company’s contribution format income statement for last month is given be
ID: 2590105 • 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.
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 $8.70 per unit. However, fixed expenses would increase to a total of $736,020 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.)
Refer to the income statements in (1) above. For both present operations and the proposed new operations, compute
The margin of safety in both dollar and percentage terms.
Refer again to the data in (1) above. 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 50% without any change in selling price; the company’s new monthly fixed expenses would be $408,900, and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy.
Sales (47,000 units × $29 per unit) $ 1,363,000 Variable expenses 954,100 Contribution margin 408,900 Fixed expenses 327,120 Net operating income $ 81,780
Explanation / Answer
1. Morton Company
Contribution Margin Income Statements
2. a. Degree of Operating Leverage : Contribution Margin / Net Operating Income
b. Break-even point in dollar sales : Fixed Expenses / Contribution Margin Ratio
Contribution Margin Ratio = Contribution Margin / Sales
c. Margin of Safety:
In dollar terms: Actual Sales Revenue - Break-even Sales Revenue
In percentage terms : ( Actual Sales Revenue - Break-even Sales Revenue) / Actual Sales Revenue
3. The cyclical movements in the economy.
4. Break-even point in dollar sales = $ 408,900 / ( 511,125 / 2,044,500) = $ 1,635,600
New Contribution Margin = ( 81,780 + 25 %) + $ 408,900 = $ 511,125.
New Sales Revenue = ( 47,000 + 50%) x $ 29 = $ 2,044,500.
Present Operations If New Equipment is Purchased $ $ Sales 1,363,000 1,363,000 Variable Expenses 954,100 545,200 Contribution Margin 408,900 817,800 Fixed Expenses 327,120 736,020 Net Operating Income 81,780 81,780Related Questions
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