Casas Modernas of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Rafael Jiminez, 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 $1,720,000 $1,720,000
Variable costs 1,376,000 688,000
Contribution margin 344,000 1,032,000
Fixed costs 114,667 802,667
Net income $229,333 $229,333
Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.)
Degree of Operating Leverage
Manual System _____
Computerized System _____
Calculate the increase in Net income for each alternative if sales increased by $118,000.
Increase in Net Income
Manual System _____
Computerized System _____
Which alternative would produce a higher net income?
Computerized System _____
Manual System _____
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.
Computerized System _____
Manual System _____
