Exercise 20-15

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 System Computerized System Sales $1,710,000 $1,710,000 Variable costs 1,368,000 684,000 Contribution margin 342,000 1,026,000 Fixed costs 121,355 805,355 Net income $220,645 $220,645

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

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Calculate the increase in Net income for each alternative if sales increased by $132,000.

Increase in Net Income Manual System Computerized System

Which alternative would produce the higher net income ? Computerized System Manual System

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Calculate the margin of safety ratio. (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. Computerized System Manual System

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