Question

or nearly 20 years, Specialized Coatings has provided painting and galvanizing services for manufacturers in its region. Manufacturers of various metal products have relied on the quality and quick turnaround time provided by Specialized Coatings and its 20 skilled employees. During the last year, as a result of a sharp upturn in the economy, the company’s sales have increased by 30% relative to the previous year. The company has not been able to increase its capacity fast enough, so Specialized Coatings has had to turn work away because it cannot keep up with customer requests.

Top management is considering the purchase of a sophisticated robotic painting booth. The booth would represent a considerable move in the direction of automation versus manual labor. If Specialized Coatings purchases the booth, it would most likely lay off 15 of its skilled painters. To analyze the decision, the company compiled production information from the most recent year and then prepared a parallel compilation assuming that the company would purchase the new equipment and lay off the workers. Those data are shown below. As you can see, the company projects that during the last year it would have been far more profitable if it had used the automated approach.

		Current Approach		Automated Approach
Sales		$2,000,000		$2,000,000
Variable costs		1,500,000		1,000,000
Contribution margin		500,000		1,000,000
Fixed costs		380,000		800,000
Net income		$120,000		$200,000

Interpret the contribution margin ratio under each approach.

Discuss the implications of break-even point in sales dollars under each approach.

Interpret the margin of safety ratio under each approach

Discuss the issues that the company must consider in making this decision.

Answer 1

6 Break even point in sales dollars. - Brek ere point is the productim level at which total revenues equal total expenses. Breakevent point: fixed cost In Sales doller Contributan Margineata, Contribution Mar current dictomated approach approach Brekeven point: 380m 800 om (Sales & 0.25 0.50 */5,20,000 1600 oor Answer. a) Interpret contributim margin ratio contre butim Margin Rates Conbribution المهلهله In this option is better Margin of Safety Ration - (Revenue - Breckerond 9 Current Approach 500cm 20 DO DOO Automated approach 1000000 2000000 Revenue Contribution- Margin Ratio 0:25 0.50 Contributi m Margin ratio is very useful fore. decision mabling. It indicates how a particular product Contributes to the overall prosit of the company. The general rule is " The higher the ratio, the more money is available to cover the business prechead expenses. In this questin Automated approach is better... Current Approach sectomete approach 2000000 - 152000) 20001520-lan 2000000 -0.24=247. 0.20 . This mean by option a sales revenue candros by 24t. without incurring losses. If Sales blecrease by more then 244. then the company will incur in losses, and in option (6) sales revenue can drop by 20t. coithout incurring losses. If Sales decrease by more then 20t. then the company will incurr lossen