Morton Company’s contribution format income statement for last month is given below:           Sales (41,000 units × $20 per unit) $ 820,000   Variable expenses   574,000   Contribution margin   246,000   Fixed expenses   196,800   Net operating income $ 49,200       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 $6.00 per unit. However, fixed expenses would increase to a total of $442,800 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 $367,360; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

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ISBN:9781947172609
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Chapter3: Cost-volume-profit Analysis
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Problem 6EB: Kerr Manufacturing sells a single product with a selling price of $600 with variable costs per unit...
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Morton Company’s contribution format income statement for last month is given below:
 

       
Sales (41,000 units × $20 per unit) $ 820,000  
Variable expenses   574,000  
Contribution margin   246,000  
Fixed expenses   196,800  
Net operating income $ 49,200  
 

 

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 $6.00 per unit. However, fixed expenses would increase to a total of $442,800 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 $367,360; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

Answer is complete but not entirely correct.
Complete this question by entering your answers in the tabs below.
Required 1 Required 2
Required 3
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 $367,360; and its net operating income would increase by 20%. Compute the company's break-even point
in dollar sales under the new marketing strategy. (Hint: figure out the new variable cost per unit by preparing the new
contribution format income statement.) (Do not round intermediate calculations. Round your answer to the nearest whole
dollar amount.)
New break even point in dollar
sales
Required 4
S 897,314 X
< Required 3
Required 4 >
Show less
Transcribed Image Text:Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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 $367,360; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy. (Hint: figure out the new variable cost per unit by preparing the new contribution format income statement.) (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) New break even point in dollar sales Required 4 S 897,314 X < Required 3 Required 4 > Show less
Morton Company's contribution format Income statement for last month is given below:
Sales (41,000 units × $20 per unit)
Variable expenses
Contribution margin.
Fixed expenses
Net operating income
$
$
820,000
574,000
246,000
196,800
49,200
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 $6.00 per unit. However, fixed expenses would increase to a total of $442,800 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 $367,360; and Its
net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing
strategy.
Transcribed Image Text:Morton Company's contribution format Income statement for last month is given below: Sales (41,000 units × $20 per unit) Variable expenses Contribution margin. Fixed expenses Net operating income $ $ 820,000 574,000 246,000 196,800 49,200 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 $6.00 per unit. However, fixed expenses would increase to a total of $442,800 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 $367,360; and Its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.
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