Question

Bergen Hospital is contemplating an investment in an automated surgical system. Its current process relies on the a number of skilled physicians. The new equipment would employ a computer robotic system operated by a technician. The company requested an analysis of the old technology versus the new technology. The accounting department has prepared the following CVP income statements for use in your analysis.

		Old		New
Sales		$3,153,000		$3,153,000
Variable costs		1,582,200		712,800
Contribution margin		1,570,800		2,440,200
Fixed costs		1,108,800		1,859,200
Net income		$462,000		$581,000

(a)

Compute the degree of operating leverage for the company under each scenario. (Round answers to 2 decimal places, e.g. 15.72.)

		Degree of operating leverage
Old
New

Answer 1

Old: 3.40;

New: 4.20.

*The relative mix of a business's variable costs and fixed costs is measured by the operating leverage.

• Degree of Operating Leverage = Contribution Margin / Net Income
• High Operating Leverage: Small increase in sales will yield a large percentage increase in net income;
• Low Operating Leverage: Large increase in sales is necessary to significantly increase in net income;

Operating Leverage= Contribution Margin Net Income Contribution Margin Net Income 3.40 old 1,570,800 462,000 $ $ Contribution Margin Net Income 4.20 New 2,440,200 581,000 $ $

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