Question

Frieden Company's contribution format income statement for last month is shown below:

Sales (45,000 units)	$	1,800,000
Variable expenses		1,260,000
Contribution margin		540,000
Fixed expenses		432,000
Operating income	$	108,000

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 $540,000 per month. However, variable expenses would decrease by $12 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	%
	0	$0	0	0	$0	0
	$0			$0

Answer 1

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 % Sales 1800000 40 100% 1800000 40 100% Variable cost 1260000 28 70% 720000 16 40% Contribution margin 540000 12 30% 1080000 24 60% Fixed cost 432000 972000 Income from operation 108000 108000