Problem 4-27 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO4, LO5, LO6, L07, L

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Problem 4 27 Changes In Cost Structure Break Even Analysis Operating Leverage Margin Of Safety Lo4 Lo5 Lo6 L07 L 1 (43.67 KiB) Viewed 77 times

Problem 4 27 Changes In Cost Structure Break Even Analysis Operating Leverage Margin Of Safety Lo4 Lo5 Lo6 L07 L 2 (27.31 KiB) Viewed 77 times

Problem 4 27 Changes In Cost Structure Break Even Analysis Operating Leverage Margin Of Safety Lo4 Lo5 Lo6 L07 L 3 (11.72 KiB) Viewed 77 times

Problem 4-27 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO4, LO5, LO6, L07, L08] Frieden Company's contribution format income statement for last month is shown below: Sales (30,000 units) Variable expenses Contribution margin Fixed expenses Operating income $1,080,000 810,000 270,000 243,000 $ 27,000 Competition is intense, and Frieden Company's profits vary considerably from one year to the next. Management is exploring opportunities to increase profitability. Required: 1. Frieden's management is considering a major upgrade to the manufacturing equipment, which would result in fixed expenses increasing by $270,000 per month. However, variable expenses would decrease by $9 per unit. Selling price would not change. Prepare two contribution format income statements, one showing current operations and one showing how operations would appear if the upgrade is completed. Show an Amount column, a Per Unit column, and a Percentage column on each statement. FRIEDEN COMPANY Contribution Margin Income Statement Present Proposed Amount Per Unit % Amount % Per Unit
2. Refer to the income statements in requirement 1 above. For both current operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollars, and (c) the margin of safety in both dollar and percentage terms. Present Proposed a. Degree of operating leverage b. Break-even point in dollars c Margin of safety in dollars Margin of safety in percentage % % 3-a. Calculate the unit sales per month at which Frieden management will be indifferent between doing the major upgrade to the manufacturing equipment and not doing the upgrade. Unit sales per month 3-b. Based on the above analysis, should Frieden proceed with the major upgrade? O Yes O No
3-b. Based on the above analysis, should Frieden proceed with the major upgrade? Yes No 3-c. Why or why not? In this case, the indifference point the current level have an impact on of sales at which point the upgarde the operating income. So Frieden's proceed to upgrade.