Problem 4-27 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [L04, L05. L06. L07. L08] Frieden Company's contribution format income statement for last month is shown below: Sales (40,000 units) $1,200,000 Variable expenses 720,000 Contribution margin 480,000 Fixed expenses 432,000 Operating income $ 48,000 ' Competition is intense, and Frieden Company's prots vary considerably from one year to the next. Management is exploring opportunities to increase protability. Required: 1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $480,000 per month. However, variable expenses would decrease by $12 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. 2. Refer to the income statements in requirement1 above. For both current operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the breakeven point in dollars, and (c) the margin of safety in both dollar and percentage terms. . Degree of operating leverage --- Break-even point in dollars Margin of safety in dollars Margin of safety in percentage 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. 3-b. Based on the above analysis, should Frieden proceed with the major upgrade? 0 Yes O No 3-c. Why or why not? In this case,the indifference point the current level the operating income. So Frieden's proceed to upgrade. 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 $33,000 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? 0 Yes O No