Question

Tasty Time Cafeteria operates cafeteria food services in public buildings in the Midwest. Tasty Time is contemplating a major change in its cost structure. Currently, all of their cafeteria lines are staffed with hourly wage employees who hand serve the food to customers. Benson Riggs, Tasty Time’s owner, is considering replacing the employees with an automated self-service system. However, before making the change, Benson would like to know the consequences of the change, since the volume of business varies significantly from location to location. Shown below are the CVP income statements for each alternative.

		Personal Service System		Automated Self-Service System
Sales		$2,030,000		$2,030,000
Variable costs		1,522,500		1,015,000
Contribution margin		$507,500		$1,015,000
Fixed costs		101,500		609,000
Net Income		$406,000		$406,000

A) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. (Round answers to 2 decimal places, e.g. 0.25.)

		Personal Service System		Automated Self-Service System
Margin of safety ratio

B)Tasty Time’s vice president of finance has offered another option. He suggests a different system that combines personal service at key points in the cafeteria line with a less expensive automated self -service system for the other items. The financial information on this system is given below:

		Blended Service System
Sales		$2,030,000
Variable costs		1,218,000
Contribution margin		$812,000
Fixed costs		406,000
Net Income		$406,000

Determine the degree of operating leverage for this option. (Round answer to 2 decimal places, e.g. 15.25.)

Operating leverage

C) How much would net income increase if sales increased by $203,000? (Round answer to 2 decimal places, e.g. 15.25%.)

Net income

%

D)

Using the margin of safety ratio, how large of a decline in sales could this option sustain before operating at a loss. (Round margin of safety ratio to 2 decimal places, e.g. 0.25.)

Margin of safety ratio
Decline in sales		%

Answer 1

Answer is given below with all working

Automated Personal A) Service System Self-service System Margin of Safety Ratio (MOS/Total Sales)*100 80% 40% Margin of Safety (Total Sales Break even Sales) $1,624,000 $812,000 Contribution Margin ratio Personal Automated Self-service System Service System $507,500 $2,030,000 $1,015,000 $2,030,000 Contribution Sales 25% 50% CM Ratio Break even Point $101,500 $609,000 Fixed Cost 25% 50% CM Ratio $1,218,000 Break even sales $406,000 Degree of Operating Leverage B) $812,000 Contribution 2 $406,000 EBIT C) Net Income Sales Growth 10% Degree of Operating Leverage Net income increase % 2 20% Net Income Increase 81,200 $2,233,000 $1,339,800 $893,200 Sales Variable Cost Contribution margin Fixed Cost Net profit $406,000 $487,200 $406,000 Existing income Net income increase Net income % increase $81,200 20% Margin of Safety Ratio D) Decline in Sales % 50% 50% Margin of Safety (Total Sales Break even Sales) $1,015,000 Contribution Margin ratio $812,000 $2,030,000 Contribution Sales 40% CM Ratio Break even Point Fixed Cost $406,000 40% CM Ratio $1,015,000 Break even sales