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Solution:
Part 1 – Contribution Margin Ratio
Current |
Automated |
|
Approach |
Approach |
|
Contribution margin (a) |
510,000 |
1,020,000 |
Sales (b) |
$2,040,000 |
$2,040,000 |
Contribution Margin Ratio (a/b x 100) |
25.00% |
50.00% |
Part 2 --- Break Even Point in sales dollars
Break Even Point in sales dollars = Total Fixed Costs / Contribution Margin Ratio
Current |
Automated |
|
Approach |
Approach |
|
Total Fixed Costs (a) |
388,000 |
816,000 |
Contribution Margin Ratio (b) |
25% |
50% |
Break Even Point in sales dollars (a / b) |
$1,552,000 |
$1,632,000 |
Part 3 – Margin of Safety
Margin of Safety = Total Sales – Break Even Sales in dollars
Current |
Automated |
|
Approach |
Approach |
|
Total Sales (a) |
2,040,000 |
2,040,000 |
Break Even Point in sales dollars (b) |
$1,552,000 |
$1,632,000 |
Margin of Safety (a - b) |
$488,000 |
$408,000 |
Margin of Safety Ratio = Margin of Safety in dollar /Total Sales x 100
Current Approach = 488000 / 2040,000 x 100 = 23.92%
Automated Approach = 408000 / 2040000 x 100 = 20%
Part 4 – Degree of Operating Leverage
Degree of Operating Leverage = Contribution Margin / Net Income
Current |
Automated |
|
Approach |
Approach |
|
Contribution Margin (a) |
510,000 |
1,020,000 |
Net Income (b) |
$122,000 |
$204,000 |
Degree of Operating Leverage (a/b) |
4.18 |
5.00 |
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