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 $1,500,000 $1,500,000 Variable costs 1,200,000 600,000 Contribution margin 300,000 900,000 Fixed costs 100,000 700,000 Net income $ 200,000 $ 200,000 Instructions Determine the degree of operating leverage for each alternative. Which alternative would produce the higher net income if sales increased by $150,000? Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.
E6.15 (LO 4), AN 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 $1,500,000 $1,500,000
Variable costs 1,200,000 600,000
Contribution margin 300,000 900,000
Fixed costs 100,000 700,000
Net income $ 200,000 $ 200,000
Instructions
Determine the degree of operating leverage for each alternative.
Which alternative would produce the higher net income if sales increased by $150,000?
Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.
Compute degree of operating leverage and impact on net income of alternative cost structures.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
