Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen.

Alfonso Jiminez, Arquitectos’ owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Alfonso 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 Computerized System System Sales $1,500,000 $1,500,000 Variable costs 1,200,000 600,000 Contribution margin 300,000 900,000 Fixed costs 50,000 650,000 Net income $ 250,000 $ 250,000 Instructions

(a) Determine the degree of operating leverage for each alternative.

(b) Which alternative would produce the higher net income if sales increased by $150,000?

(c) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.

AppendixLO1