PROBLEM $5-29$ Changes in Cost Structure; Break$-$Even Analysis; Operating Leverage; Margin of Safety LO$5-3,$

$$ LO$5-4,$ LO$5-5,$ LO$5-7$

Morton Company's contribution format income statement for last month is given below:

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.

Page $234$

Required:

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 $$9$ per unit. However, fixed expenses would increase to a total of $$225,000$ 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. Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the

fixed expenses.

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.

Refer again to the data in $(1).$ As a manager, what factor would be critical in deciding whether to purchase the new equipment? $($Assume

enough funds are available to make the purchase.$)$

Refer to the original data. Rather than purchase new equipment, the marketing manager argues 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 $$180,000$; and its net operating income would

increase by $20\%.$ Compute the company's break$-$even point in dollar sales under the new marketing strategy. Do you support the

marketing manager's proposal?