COP-26 Inc. is a company that finds alternative uses of waste. The company’s statement

of financial position on April 30 is as follows:

COP- 26 Inc.

Statement of Financial Position April 30, 2021

Assets Cash	$ 9,000
Accounts Receivable	54,000
Inventory	30,000
Current Assets	93,000
Building (net of depreciation)	77,000
Equipment (net of depreciation)	130,000
	207,000
Total Assets	$ 300,000
Liabilities Accounts Payable	$ 63,000
Note Payable	14,500
Shareholders' Equity	$ 77,500
Common Shares	$ 180,000
Retained Earnings	42,500
	$ 222,500
Total Liabilities and Shareholders' Equity	$ 300,000

The company is in the process of preparing budget information for May. Several budget items have already been prepared, as follows:

1. Sales are budgeted at $200,000 for May. Of these sales. $60,000 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the remainder are collected in the following month. All the April 30 receivables will be collected in May.

2. Purchases of inventory are expected to total $120,000 during May. These purchases will all be on account. 40% of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All the April 30 accounts payable to suppliers will be paid during May.

3. The May 31 inventory balance is budgeted at $40,000

4. Operating expenses for May are budgeted at $72,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,000 for the month.

5. The note payable on the April 30 balance sheet will be paid during May, with $100 in interest. (all of the interest relates to May.)

6. New digestor equipment costing $6,500 will be purchased in for cash during May.

7. During May, the company will borrow $20,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

The controller just sat down and realizes the task at hand. She knew she will be doing the following statements for the budget, a cash budget for May. In addition, she knows she must prepare schedules showing budgeted cash receipts from sales and budgeted cash payments for inventory purchases. Once she completed that she needs to prepare a statement of retained earnings and a statement of financial position as of May 31.

The second part of this case includes an internal income statement using the contribution format as of April 30, 2021:

COP- 26 Inc.

Contribution Format Income Statement April 30, 2021

Revenues	$ 800,000
Variable Expenses	560,000
Contribution Margin	$ 240,000
Fixed Expenses	$ 192,000
Net Operating Income	$ 48,000
Note: Revenues based on 40,000 units sold.

The industry in COP-26 Inc. works in is quite cyclical with the movements in the economy. Thus, profits vary considerably from year to year according to the general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

The company has the following ideas:

1. An opportunity to buy new equipment that would automate a portion of its operations. Variable expenses would be reduced by $6 per unit. However, fixed expenses would increase to a total of $432,000 each month. You will need to prepare two contribution format income statements: one showing how operations would be with the new equipment and one showing the present situation. Refer to Exhibit 1 for format.

2. Now look at both present and proposed new operations and calculate the break- even point in dollars and do an analysis that includes the degree of operating leverage and margin of safety in both dollars and percentage terms.

3. As one the members on the management team what factor would be paramount in your mind in deciding whether to purchase the new equipment. (Assume that the loan is not an issue as there is money available.)

4. A second option is instead of buying the equipment, the marketing team has proposed a new strategy. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespeople be paid fixed salaries and that the company invest heavily in advertising. The marketing manager claims that the new approach would increase unit sales by 50% without any change in selling price; the company’s new monthly fixed expenses would be

$240,000; and its net operating income would increase by 25%. Calculate the break-even in dollar sales for the company under the new marketing strategy. As one of the members of the management team making decisions on this option, would you agree with the marketing team’s proposal?

Exhibit 1

	Amount	Per Unit	%

Finally, as the company reflects on its current situation, the senior management team wants to reflect on the concept of leadership and identify three important concepts that a leader must consider and briefly explain them.