'

Question \#2: Change in Cost Structure; BE Analysis, Operating Leverage, MOS Morton Company's contribution format income statement for last month is given below: The industry is sensitive to cyclical movements in the economy; thus, profits vary considerably from year to year. The company has a large amount of unused capacity and is considering options to improve profits. Required: 1. New equipment would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $9 per unit. Variable Expense/unit = However, fixed expenses would increase to a total of $225,000 each month. Fixed Expenses = Prepare two contribution format income statements (in template below), one showing present operations and one showing operations if the new equipment is purchased. 2. For the present operations and the proposed new operations, compute (a) the degree of operating leverage (for both scenarios) (b) the break-even point in dollar sales (for both scenarios) (c) the margin of safety in dollars and the margin of safety percentage (for both scenarios) Refer to the original data (from Question 2). Rather than purchase new equipment, the marketing manager argues that 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. They believe 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