E-Z Seats manufactures swivel seats for customized vans. It currently manufactures 10,000 seats per year, which it sells for $500 per seat. It incurs variable costs of $200 per seat and fixed costs of $2,000,000. It is considering automating the upholstery process, which is now largely manual. It estimates that if it does so, its fixed costs will be $3,000,000, and its variable costs will decline to $100 per seat.

Instructions

With the class divided into groups, answer the following questions.

(a) Prepare a CVP income statement based on current activity.

(b) Compute contribution margin ratio, break-even point in dollars, margin of safety ratio, and degree of operating leverage based on current activity.

(c) Prepare a CVP income statement assuming that the company invests in the automated upholstery system.

(d) Compute contribution margin ratio, break-even point in dollars, margin of safety ratio, and degree of operating leverage assuming the new upholstery system is implemented.

(e) Discuss the implications of adopting the new system.