Morton Company's contribution format income statement for last month is given below: Sales (49,000 units x $29 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,421,000 994,700 426,300 341,040 $ 85,260 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 $8.70 per unit. However, fixed expenses would increase to a total of $767,340 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 $544,243; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.
Morton Company's contribution format income statement for last month is given below: Sales (49,000 units x $29 per unit) Variable expenses Contribution margin Fixed expenses Net operating income $ 1,421,000 994,700 426,300 341,040 $ 85,260 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 $8.70 per unit. However, fixed expenses would increase to a total of $767,340 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 $544,243; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter11: Performance Evaluation And Decentralization
Section: Chapter Questions
Problem 27E: Margin, Turnover, Return on Investment, Average Operating Assets Elway Company provided the...
Related questions
Question
solve all the requirements
![Morton Company's contribution format income statement for last month is given below:
Sales (49,000 units x $29 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating income
$ 1,421,000
994,700
426,300
341,040
$ 85,260
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 $8.70 per unit. However, fixed expenses would increase to a total of $767,340 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 $544,243; 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%2Fbd5ca586-ef73-47ac-9620-7bccb84273ae%2F5a450a4f-0a49-4025-bc83-de6c754dd846%2Fzzc5sd_processed.png&w=3840&q=75)
Transcribed Image Text:Morton Company's contribution format income statement for last month is given below:
Sales (49,000 units x $29 per unit)
Variable expenses
Contribution margin
Fixed expenses
Net operating income
$ 1,421,000
994,700
426,300
341,040
$ 85,260
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 $8.70 per unit. However, fixed expenses would increase to a total of $767,340 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 $544,243; and its
net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing
strategy.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Step 1: Conceptual introduction of CVP analysis
VIEWStep 2: Prepare contribution format income statements (Requirement 1)
VIEWStep 3: Calculate operating leverage, break even and margin of safety (Requirement 2)
VIEWStep 4: Factors to be considered while deciding whether to purchase new equipment (requirement 3)
VIEWSolution
VIEWTrending now
This is a popular solution!
Step by step
Solved in 5 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Managerial Accounting: The Cornerstone of Busines…](https://www.bartleby.com/isbn_cover_images/9781337115773/9781337115773_smallCoverImage.gif)
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
![Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
![Managerial Accounting: The Cornerstone of Busines…](https://www.bartleby.com/isbn_cover_images/9781337115773/9781337115773_smallCoverImage.gif)
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
![Managerial Accounting](https://www.bartleby.com/isbn_cover_images/9781337912020/9781337912020_smallCoverImage.jpg)
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
![Cornerstones of Cost Management (Cornerstones Ser…](https://www.bartleby.com/isbn_cover_images/9781305970663/9781305970663_smallCoverImage.gif)
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning