Morton Company's contribution format income statement for last month is given below: Sales (46,000 units x $21 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 966,000 676,200 289, 800 231, 840 57,960 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.
Morton Company's contribution format income statement for last month is given below: Sales (46,000 units x $21 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $ $ 966,000 676,200 289, 800 231, 840 57,960 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![Problem 2-29 (Algo) Changes In Cost Structure; Break-Even Analysis; Operating Leverage; Margin of
Safety [LO2-4, LO2-5, LO2-7, LO2-8]
Morton Company's contribution format income statement for last month is given below:
Sales (46,000 units x $21 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating income
$
$
966,000
676,200
289,800
231, 840
57,960
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
ment has come onto market that would allow Morton Company to automate a portion of its operations. Variable
expenses would be reduced by $6.30 per unit. However, fixed expenses would increase to a total of $521,640 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 $495,558; and its
net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing
strategy.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb0c53c3c-d25b-4f46-ae7f-d9559756d1d4%2Fabd188c5-60bb-48e1-92c1-0326730d6995%2Fn2k43k_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 2-29 (Algo) Changes In Cost Structure; Break-Even Analysis; Operating Leverage; Margin of
Safety [LO2-4, LO2-5, LO2-7, LO2-8]
Morton Company's contribution format income statement for last month is given below:
Sales (46,000 units x $21 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating income
$
$
966,000
676,200
289,800
231, 840
57,960
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
ment has come onto market that would allow Morton Company to automate a portion of its operations. Variable
expenses would be reduced by $6.30 per unit. However, fixed expenses would increase to a total of $521,640 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 $495,558; 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: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 $6.30 per unit. However, fixed expenses would increase to a total of $521,640 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 $495,558; and its
net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing
strategy.
Complete this question by entering your answers in the tabs below,
Required 1
Required 2
Required 3
Required 4
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
$6.30 per unit. However, fixed expenses would increase to a total of $521,640 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.)
Morton Company
Contribution Income Statement
Amount
Present
Per Unit
Required 1
%6
%
%
%
Amount
Required 2 >
Proposed
Per Unit
%
%
%
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Step 1: Conceptual introduction of CVP analysis
VIEWStep 2: Prepare two contribution format income statements (Requirement 1)
VIEWStep 3: Determine degree of operating leverage, break even point and margin of safety (Requirement 2)
VIEWStep 4: Determine the factor to be considered while deciding to purchase new equipment (Requirement 3)
VIEWStep 5: Determine break even sales in dollar (Requirement 4)
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