Question

Casas Modernas of Juarez, Mexico, is contemplating a maior change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen, Rafael Diminez, 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 Computerized System Sales Variable costs Contribution margin Fixed casts $1,650,000 1.344,000 336,000 95,000 $240,000 $1.600.000 672.000 1,000,000 768.gop Net income $240,000 Your answer is correct. Determine the degree of operating leverage for cach alternative. (Round answers to 2 decimal places, c.9. 1.25.) Degree of Operating Leverage Manual System Computerized System LINK TO TEXT Your answer is partially correct. Try again. Calculate the increase in Net income for each alternative if sales increased by $142,ODD. Increase in Net Income Manual System 508400 Computerized System T 565200 Tcomputerized System which alternative would produce the higher net income? Comp x Your answer is incorrect. Try again. Calculate the margin of safety ratio. (Round ratios to 2 decimal places, e.g. 0.25.) Margin of Safety ratio Manual System Computerized System Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss, Manual system

Answer 1

Contribution margin ratio:

Manual system = $336,000 / $1,680,000 = 20%

Computerised system = $1,008,000 / $1,680,000 = 60%

Increase in net income:

Manual system = $142,000 X 20% = $28,400

Computerised system = $142,000 X 60% = $85,200

Break even sales:

Manual system = $96,000 / 20% = $480,000

Computerised system = $768,000 / 60% = $1,280,000

Margin of safety ratio:

Manual system = ($1,680,000 - $480,000) / $1,680,000 = 71.43

Computerised system = ($1,680,000 - $1,280,000) / $1,680,000 = 23.81

Greater decline in sales before operating loss Manual system