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Problem 4-27 Changes in Cost Structure; Break-Even Analysis: Operating Leverage: Margin of Safety (LO4, LOS, LO6, L07, LOB] Frieden Company's contribution format income statement for last month is shown below Sales (40,000 units) Variable expenses Contribution margin Fixed expenses 11,200,000 140,000 10,000 295,000 72,000 Operating income Competition is intense, and Frieden Company's profits vary considerably from one year to the next Management is exploring opportunities to increase profitability Required: 1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $360,000 per month. However, variable expenses would decrease by $9 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 FRIEDEN COMPANY Contribution Margin Income Statement Present Proposed Amount Per Unit % Amount Per Unit 5 oped Ok # FRIEDEN COMPANY Contribution Margin Income Statement Present Amount Per Unit Margin of safety in percentage 0 0 S 0 0 $ 0 0 S 0 5 0 ces 2. 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. Present Proposed a Degree of operating leverage b Break-even point in dollars c Margin of safety in dollars Amount Proposed Par Unit Www 10 5 floce PM Mences 3-a. Calculate the unit sales per month at which Frieden management will be indifferent between doing the major upgrade to the manufacturing equipment and not doing the upgrade per mont 3-b. Based on the above analysis, should Frieden proceed with the major upgrade? O Yes O No 3-c. Why or why not? the current level in this case the indifference point have an impact on of sales at which point the upgarde proceed to upgrade the operating income So Frieden's Mc Graw PRIM 10 Sapped ences 4-a. Refer to the original data. Instead of doing the major upgrade to the equipment, management is considering introducing a new advertising campaign that will increase fixed expenses by $30,000 per month Management believes the new advertisements will increase monthly unit sales by 10%. In this case what would be imapact on operating income. Operating income 4-b. Should Frieden proceed with the new advertising campaign? O Yes O No