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:

Sales (15,000 units x $30 per unit) $ 450,000

Variable Expenses 315,000

Contribution Margin 135,000

Fixed Expenses 90,000

Net Operating income $ 45,000

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.
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?

ANSWER:

1. Contribution Income Statemen For Present Operations

Morton Company
Contribuiton Income Statemen
   
  Total Per Unit Percent
Sales (15.000 units x $30 per unit) $ 450,000 30 100%
Variable Expenses $ 315,000 21 70%
Contribution Margin $ 135,000 9 30%CMR
Fixed Expenses $ 90,000  
Net operating Income $ 45,000  
       
Contribution Income Statemen For Opperations Would Appear If New Equipment
Purchased

Morton Company
Contribuiton Income Statemen
  Total Per Unit Percent
Sales (15.000 units x $30 per unit) $ 450,000 30 100%
Variable Expenses $ 180,000 12 40%
Contribution Margin $ 270,000 18 60%CMR
Fixed Expenses $ 225,000  
Net operating Income $ 45,000  
       
2. Present Operations

a. Operating leverage = Contribution Margin

Net Operating Income

= $135.000
$45.000

= 3

b. Break event point = Fixed Expense

CMR

= $90.000
0,3

= $300.000

c. Margin of Savety = Total Sales – Break even point

= $ 450.000 – $300.000
= $ 150.000

Margin Of safety Percentage = 150.000 X 100%

450.000

= 33,33%

New Operations

a. Operating leverage = $270.000

$45.000

= 6

b. Break Even Point = $225.000

0,6

= $ 375.000

c. Margin of safety = $450.000 – $375.000

= $75.000

Margin Of safety Percentage = 75.000 X 100%

450.00

= 16,67%
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

Saya setuju dengan keputusan manajer karena dengan menerapkan strategi pemasaran
tersebut. Karena saya pikir itu berdampak baik karena dapat menigkatkan penjulan dan
laba neto operasi perusahaan.