Morton Company’s contribution format income statement for lastmonth is given below:

            
Sales (46,000 units × $27 per unit)   $  1,242,000     
Variable expenses      869,400    
Contribution margin      372,600    
Fixed expenses      298,080    
Net operating income   $   74,520    

The industry in which Morton Company operates is quite sensitive tocyclical movements in the economy. Thus, profits vary considerablyfrom year to year according to general economic conditions. Thecompany has a large amount of unused capacity and is studying waysof improving profits.

Required:
1. New equipment has come onto the market that would allow MortonCompany to automate a portion of its operations. Variable expenseswould be reduced by $8.10 per unit. However, fixed expenses wouldincrease to a total of $670,680 each month. Prepare twocontribution format income statements, one showing presentoperations and one showing how operations would appear if the newequipment is purchased.
2. Refer to the income statements in (1). For the presentoperations and the proposed new operations, compute (a) the degreeof operating leverage, (b) the break-even point in dollar sales,and (c) the margin of safety in dollars and the margin of safetypercentage.
3. Refer again to the data in (1). As a manager, what factor wouldbe paramount in your mind in deciding whether to purchase the newequipment? (Assume that enough funds are available to make thepurchase.)
4. Refer to the original data. Rather than purchase new equipment,the marketing manager argues that the company’s marketing strategyshould be changed. Rather than pay sales commissions, which arecurrently included in variable expenses, the company would paysalespersons fixed salaries and would invest heavily inadvertising. The marketing manager claims this new approach wouldincrease unit sales by 30% without any change in selling price; thecompany’s new monthly fixed expenses would be $475,686; and its netoperating income would increase by 20%. Compute the company'sbreak-even point in dollar sales under the new marketingstrategy.