PROBLEM 4-29 changes In Cost Structure: Break Event Analysis: operating Leverage, Margin of Safety (L04, L05, LO8)
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………. This, provit vary considerably from year toaccording to general economic condition. The company has a large amount of unused capacity and is studying ways of improving profits.
…..
1. 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 expense would increase to a total of $ 225.000 each month. Prepare two contribution format income statement, 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.
2. Refer to the income statements in (I) above. For both present operations and the prposed new operations, compute (a) the degree of operating leverage, (b) the bereak even point in dolar sales, and (c) the mergin of safety in both dollar and percentage terms/
3. Refer to again to the data in (I) above As manager, what factor would be paramount in yout mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase)
4. Refer to the original data, rathter than purchased new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Sales (15,000 units x $30 per unit) $ 450,000
Variable Expenses 315,000
Contribution Margin 135,000
Fixed Expenses 90,000
Rather than pay sales commissions, which are currently included in variable expenses, the company would pay sales persons 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 break even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager’s proposal?
a. Operating leverage = Contribution Margin
c. Margin of Savety = Total Sales – Break even point = $ 450.000 – $300.000
c. Margin of safety = $450.000 – $375.000 = $75.000
Margin Of safety Percentage = 75.000 X 100% 450.00
3. Sebagai seorang manajer factor yang akan mendasari dalam memutuskan membeli atau tidaknya perlengkapan baru adalah dapat dilihat dari tingkat operating leverage dan Margin of savety.
Operating Leverage dapat mengestimasi secara cepat dampak perubahan persentase penjualan tertentu terhadap laba neto operasi perusahaan. Kemudian Margin of safety memiliki peran penting dalam pengambilan keputusan tersebut, karena Margin Of safety ini menunjukkan seberapa besar penjualan yang boleh turun agar perusahaan tidak mengalami kerugian. Makin tinggi margin of safety, maka akan rendah resiko untuk mencapai titik impas.
4. Sales : $450.000 + (30% x $ 450.000) Fixed Cost : $ 180.000
Net operating income :$ 45.000 + (20% x $ 45.000) = $ 54.000
Total Percent
Sales $ 585,000 100%
Variable Expenses $ 351,000 60%
Contribution Margin $ 234,000 40% CMR
Fixed Expenses $ 180,000
Net operating Income $ 54,000
Break event point = Fixed Expense
CMR
= $180.000 0, 4
= $ 450.000
