Crane 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, Crane's 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 Computerized System System Sales $1,740,000 $1,740,000 Next question Variable costs 1,392,000 696,000 Contribution margin 348,000 1,044,000 Fixed costs 108,000 804,000 Net income $240,000 $240,000

A) Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.) Degree of Operating Leverage Manual System 1.45 Computerized System 4.35

B) Calculate the increase in Net income for each alternative if sales increased by $142,000 due to an increase in the number of units sold. Increase in Net Income Manual System Computerized System $

Which alternative would produce the higher net income?

C) Calculate the margin of safety ratio for the original scenarios in Part a. (Round ratios to 2 decimal places, e.g. 0.25.) Margin of Safety ratio Manual System

Computerized System

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