Broadening Your Perspective 20-2 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 pec alized 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 palinters. 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 Automated Approach Approach Sales $2,200,000 $2,200,000 1,650,0001,100,000 Variable costs Contribution marg in 550,000 1,100,000 418,000 880,000 Fixed costs $132,000 $220,000 Net income Compute the contribution margin ratio under each approach. (Round ratios to O decimal places, e.g. 15%.) Automated approach Current approach Contribution margin ratio Compute the break-even point in sales dollars under each approach. Current approachAutomated approach Break-even points in sales dollars s Using the current level of sales, compute the margin of safety ratio under each approach. (Round ratios to O declmal places, eg. is%.) Current approach Automated approach Margin of safety ratio Determine the degree of operating Jeverage for each approach at current sales levels. (Round answers to 2 declmal places a-g. 2.25.,) Current approach Automated approach Degree of operating leverage | How much would the company's net income decline under each approach with a 10% decline sales, (Round answers to 1 decimal place, e.g. 22.5%.) For a 10% drop in sales net income would % for current approach by % for Automated approach For a 10% drop in sales net income would by At what level of sales would the company's net income be the same under either approach? Net income would be equal to $ sales Broadening Your Perspective 20-2 (Essay) 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 mpany's sales have increased by 30% relative to the previous year. The company has not been able to increase its apacity ht enough so special ed Coatings has had te, 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 labo1f Specialized Coatings purchases the booth, it would most likely lay off 15 of its skilled painters. To analyze the decision, the company cm piled production information from the most recent year and then prepared a parallel compilation assuming that the company would purchase the new equlpment 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 Automated Approach Approach Sales $2,000,000 $2,000,000 1,500,000 1,000,000 Contribution margin 500,000 1,000,000 Variable costs 800,000 Fixed costs 380,000 120,000 $200,000 Net income Interpret the contribution margin ratio under each approach Discuss the implications of break-even point in sales dollars under each approach
