Question

Casas Modernas of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work- Your answer is partially correct. Calculate the margin of safety ratio. (Round ratios to 2 decimal places, e.g. 0.25.) Marg

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Answer #1
Margin of safety ratio
Manual system 0.69
Computerized system 0.23
Manual system can sustain greater decline in sales before operating at a loss.
Workings:
Contribution margin ratio
Manual system 20% =348000/1740000
Computerized system 60% =1044000/1740000
Break even point = Fixed costs/Contribution margin ratio
Break even point
Manual system 540000 =108000/20%
Computerized system 1340000 =804000/60%
Margin of safety sales = Actual sales-Break-even sales
Margin of safety sales
Manual system 1200000 =1740000-540000
Computerized system 400000 =1740000-1340000
Margin of safety ratio
Manual system 0.69 =1200000/1740000
Computerized system 0.23 =400000/1740000
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