E.15

Casas 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, Casas' 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 SystemSystem Sales Variable costs Contribution margin Fixed costs Net income $1,740,000 $1,740,000 696,000 1,044,000 804.000 240,000 1,392,000 348,000 108,000 $240,000 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 Computerized System eTextbook and Media Calculate the increase in Net income for each alternative if sales increased by $149,000 Increase in Net Income Manual System Computerized System Which alternative would produce the higher net income? eTextbook and Media Calculate the margin of safety ratio. (Round ratios to 2 decimal places, eg. 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