Question Completion:
Morton Corporation
Income Statement for the most recent month
Sales revenue (42,000 units * $24 per unit) $1,008,000
Variable cost of goods sold                 705,600
Contribution margin                      $302,400
Fixed expenses                           241,920
Net operating income                     $60,480
Answer:
Morton Corporation
The company's margin of safety in dollars would be $100,800 if it purchases and uses the new machine.
Explanation:
a) Data and Calculations:
Morton Corporation
Income Statement for the most recent month
Sales revenue (42,000 units * $24 per unit) $1,008,000
Variable cost                             705,600
Contribution margin                      $302,400
Fixed expenses                           241,920
Net operating income                     $60,480
After the renovation of operations:
Variable cost of goods sold will reduce by $7.20 per unit
Variable cost per unit before renovation = $16.80 ($705,600/42,000)
New Variable cost per unit after renovation = $9.60 ($16.80 - $7.20)
New contribution margin per unit = $14.40 ($24 - $9.60)
Contribution margin ratio = 0.60 or 60%
New total fixed expenses = $544,320
Break-even point in sales dollars = Fixed expenses/Contribution margin ratio
= $544,320/0.60
= $907,200
Margin of safety = Sales revenue - Break-even Sales Dollars
= $100,800 ($1,008,000 - $907,200)
