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palms Morton Company’s contribution format income statement for last month is given below: Sales (41,000 units 3‘ $24 per unit.) 3 934,000Variable expanses 638.. 900Contribution margin 295 .. 2 00Fixed expenses 236, 160Net: operating income 5: 59 . 040 The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus. proﬁts varyconsiderably from year to year according to general economic conditions. The company has a large amount of unused capacity and isstudying ways of improving proﬁts. Required: ‘|. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variableexpenses would be reduced by $7.20 per unit. However, ﬁxed expenses would increase to a total of $531,360 each month. Preparetwo contribution format income statements. one showing present operations and one showing how operations would appear if thenew equipment is purchased. 2. Refer to the income statements in . For the present operations and the proposed new operations. compute (a) the degree ofoperating leverage. [in] the break-even point in dollar sales. and (c) the margin of safety in dollars and the margin of safety percentage.3. Refer again to the data in [1). As a manager. what factor would be paramountin your mind in deciding whether to purchase the newequipment? (Assume that enough funds are available to make the purchase.) 4. Refer to the original data. Rather than purchase new equipment. the marketing manager argues that the oompa ny’s marketingstrategy should be changed. Rather than pay sales commissions. which are currently included in variable expenses. the companywould pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach wouldincrease unit sales by 30% without any change in selling price; the company’s new monthly ﬁxed expenses would be $376,872; and itsnet operating income would increase by 20%. Compute the company’s brea k-even point in dollar sales under the new marketingstrategy.
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