Question

PRINTER VERSION 4 BACK NEXT Broadening Your Perspective 20-2 For nearly 20 years, Spec on the quality and quick turnaround time provided by Specialized Coatings and its 20 skilled employees. During the last year, as a result of a sharp upturn in the economy, the company's sales have increased by 30% relative to the previous year. The company has not been able to increase its capacity fast enough, so Specialized Coatings has ialized Coatings has provided painting and galvanizing services for manufacturers in its region. Manufacturers of various metal products have relied had to turn work away because it cannot keep up with customer requests. Top management is considering the purchase of a sophisticated robotic painting booth. The booth would represent a considerable move in the direction of automation versus manual labor. If Specialized Coatings purchases the booth, it would most likely lay off 15 of its skilled painters. To analyze the decision, the company compled production information from the most recent year and then prepared a parallel compilation assuming that the company would purchase the new equipment and lay off the workers. Those data are shown below. As you can see, the company projects that during the last year it would have been far more profitable if it had used the automated approach. Current Automated Approach Approach $2,320,000 $2,320,000 Sales Variable costs 1,740,000 1,160,000 Contribution margin 80,001,160,000 Fixed costs 441,000 $139,000 928,000 $232,000 Net income Compute the contribution margin ratio under each approach. (Round ratios to 0 decimal places, e.g. 15%.) Automated approach Current approach Contribution margin ratio Compute the break-even point in sales dollars under each approach. Automated approach Current approach

Answer 1

CONTRIBUTION MARGIN RATIO

1) CURRENT APPROACH

(580,000 / 2320000) 100 = 25%

2) AUTOMATED APPROACH

(1160000 / 2320000 ) 100 = 50%

BREAK EVEN POINT IN DOLLAR

1) CURRENT APPROACH

FIXED COST / CONTRIBUTION MARGIN RATIO

441000 / 25%

1,764,000

2) AUTOMATE APPROACH

FIXED COST / CMR

928000 / 50%

1,856,000

answer 3.

safety of margin =( current sales level - BEP ) / current sales level

1)

current approach

(2320000 - 1764000) / 2320000

23.96%

2)

automate approach

(2320000 - 1856000 ) / 2320000

50%

answer 4

Degree of operating leverage=contribution margin / operating income

1)

current approach

580,000 / 139,000

= 4.17

2)

automated approach

1160000 / 232000

= 5

answer 5)

	current approach	automate approach
sales (10%reduced)	2088000	2088000
variable cost (10 % reduce)	1566000	1044000
contribution	522000
fixed cost	441000	928000
net income	81000	116000

current approach( 81000 / 2088000) 100

=3.8%

automate approach

(116000 / 2088000) *100

=5.5%