70.2K

Verified Solution

Link Copied!

Frieden Company's contribution format income statement for the most recent month is given below: The industry in which Frieden 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. Required: 1. New equipment has come on the market that would allow Frieden Company to automate a portion of its operations. Variable expenses would be reduced by $7.80 per unit. However, fixed expenses would increase to a total of $687,960 each month. Prepare two contribution format income statements: one showing present operations, and one showing how operations would appear if the new equipment were purchased. (Input all amounts as positive values except losses which should be indicated by minus sign. Round your "Per unie" answers to 2 decimal places.) 2. Refer to the income statements in Requirement (1) above. For both present operations and the proposed new operations, Compute: a. The degree of operating leverage. b. The break-even point in dollars. c. The margin of safety in both dollar and percentage terms. 3. Refer again to the data in Requirement (1) above. As a manager, what factor would be paramount in your mind in deciding w to purchase the new equipment? (Assume that ample funds are available to make the purchase.) Cyclical movements in the economy Reserves and surplus of the company Stock level maintained Performance of peers in the industry 4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company's marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manat suggests that salespeople be paid fixed salaries and that the company invest heavily in advertising. The marketing manager clain that this new approach would increase unit sales by 50% without any change in selling price; the company's new monthly fixed expenses would be $382,200; and its net operating income would increase by 25%. Compute the break-even point in dollar sale the company under the new marketing strategy. Do you agree with the marketing manager's proposal? 3. Refer to the data in Requirement (2) above. If the expected change in variable costs takes place, how many skateboards will have to be sold next year to earn the same net operating income, $132,000, as in the most recent year? (Do not round inrermediate calculations.) 4. Refer again to the data in Requirement (2) above. The president has decided that the company may have to raise the selling price of its skateboards. If Tyrene Products wants to maintain the same CM ratio as last year, what selling price per skateboard must it charge next year to cover the increased labour costs? (Do not round intermediate calculations. Round your onswer to 2 decimal places.) 5. Refer to the original data. The company is considering the construction of a new, automated plant. The new plant would result in the contribution margin per unit increasing by 60%, but it would cause fixed costs to increase by 90%. If the new plant is built, what would be the company's new CM ratio and new break-even point in skateboards? (Do not round intermediare calculations.)

Answer & Explanation Solved by verified expert

See Answer