Changes in Cost Structure; Break$-$Even Analysis; Operating Leverage; Margin of

Safety $(45$ marks$)$

Frieden Company's contribution format income statement for last month is shown below:

Competition is intense, and Frieden Company's profits vary considerably from one year to

the next. Management is exploring opportunities to increase profitability.

Required:

Frieden's management is considering a major upgrade to the manufacturing equipment,

which would result in fixed expenses increasing by $$240,000$ per month. However, variable

expenses would decrease by $$6$ per unit. Selling price would not change. Prepare two

contribution format income statements, one showing current operations and one showing

how operations would appear if the upgrade is completed. Show an Amount column, a Per

Unit column, and a Percentage column on each statement.

Refer to the income statements in requirement $1$ above. For both current operations and

the proposed new operations, compute $($a$)$ the degree of operating leverage, $($b$)$ the break$-$

even point in dollars, and $($c$)$ the margin of safety in both dollar and percentage terms.