1. Interpret the contribution margin ratio under each approach.

2. Discuss the implications of break-even point in sales dollars under each approach.

3. Interpret the margin of safety ratio under each approach.

4. Discuss the issues that the company must consider in making this decision.

For nearly 20 years, Specialized Coatings has provided painting and galvanizing services for manufacturers in its region. Manufacturers of various metal products have relied 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 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 compiled 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 Approach Automated Approach $2,000,000 Sales $2,000,000 1,500,000 1,000,000 Variable costs Contribution margin 500,000 1,000,000 Fixed costs 380,000 800,000 Net income $120,000 $200,000