Question

Question 3 Casas Modernas of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Rafael Jiminez, Casas' owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Rafael would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative. Manual System Sales Variable costs Contribution margin Fixed costs Net income $1,560,000 1,248,000 312,000 72,000 $240,000 Computerized System $1,560,000 624,000 936,000 696,000 $240,000 Your answer is correct. Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.) Degree of Operating Leverage Manual System 1.3 Computerized System LINK TO TEXT Your answer is correct. Calculate the increase in Net income for each alternative if sales increased by $119,000. Increase in Net Income Manual System 23800 Computerized System 71400

Answer 1

Answer with working notes is given below

Answer is given for last question only since first 2 are right answers

c) Margin of Safety ratio 0.77 Manual System Computerized System 0.26 Manual system can sustain greater decline in sales before operating at a loss Working notes: Computerized System Sales Less : Variable Cost Contribution Contribution Margin ratio (Contribution/Sales)% Manual System $1,560,000 $1,248,000 $312,000 20.00% $1,560,000 $624,000 $936,000 60.00% Break even sales Fixed Cost Contribution Margin ratio $72,000 20.00% $360,000 $696,000 60.00% $1,160,000 $1,200,000 $400,000 Margin of Safety (Actual Sales - Breakeven sales) Actual Sales $1,560,000 $1,560,000 Margin of Safety Ratio (MOS Sales/Actual Sales) 0.26 A/B