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: Sales (49,000 units $28 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $1,372,000 960,400 411,600 329,280 82,320 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 $8.40 per unit. However, fixed expenses would increase to a total of $740,880 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.) Morton Company Contribution Income Statement Present Proposed Amount Per Unit Amount Per Unit 0.00 01% 0.00 01%

Explanation / Answer

Part 1 - Contribution margin Income Statements

$19.6

($960400/49000)

$548800

($19.6-$8.4)*49000

Part 2 - Calculation of Break even point, operating leverage, margin of safety

Degree of operating Leverage

(Contribution Margin/Net Operating income)

5

($411600/$82320)

10

($823200/$82320)

Break even point in dollars

(Fixed Cost/Cotribution margin ratio)

$1097600

($329280/30%)

$1234800

($740880/60%)

Margin of safety in dollars

(Sales Revenue - Break Even Sales)

$274400

($1372000 - $1097600)

$137200

($1372000 - 1234800)

Margin of safety in %

(Margin of safety in dollars/sales revenue)*100

20%

($274400/$1372000)*100

10%

($137200/$1372000)*100

Part 3 - One Factor which will be of paramount importance should be in the mind of manager on deciding the purchase of equipment - Cyclical movements in the economy

Other factors like Estimation of future income, leverage, forecasting, Break even analysis, cash budget need to be seen.

Part 4 - Calculation of variable expenses

Net Operating Income = ($82320 + 25%) = $102900

Sales Revenue = (49000 + 50%)*$30 = $2205000

Fixed Expenses = $411600

Equation :- (dP

Net Opearing Income = Sales - Variable expenses - Fixed expenses

$102900 = $2205000 - Variable expenses - $411600

Variable expenses = $1690500

Income Statment

Break Even sales in dollars

(Fixed Cost / Contribution margin %)

$1764252

($411600/23.33%)

Particulars Current situation Proposed situation Amount Per unit % Amount Per unit % Sales $1372000 $28 100% $1372000 $28 100% Less : Variable expenses $960400

$19.6

($960400/49000)

70%

$548800

($19.6-$8.4)*49000

$11.2 40% Contribution margin $411600 $8.4 30% (Contribution Margin %) $823200 $16.8 60% (Contribution Margin %) Less : Fixed Expenses $329280 $740880 Net Operating income $82320 $82320

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