For nearly 20 years, Crane 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 Crane Coatings and its 20 skilled employees. During the past year, as a result of a sharp upturn in the economy, the companys sales have increased by 30% relative to the previous year. The company has not been able to increase its capacity fast enough, so Crane 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 labour. If Crane 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. As you can see, the company projects that during the past year it would have been far more profitable if it had used the automated approach.

a. Calculate the contribution margin ratio under each approach.

b. Calculate the break-even point in sales dollars under each approach.

c. Using the current level of sales, calculate the margin of safety ratio under each approach and interpret your findings. (Round answers to 2 decimal places, e.g. 2.75%.)

The current approach is ____________ (less/more) risky.

d. Determine the degree of operating leverage for each approach at current sales levels. (Round answers to 2 decimal places, e.g. 2.75.)

Calculate how much the companys operating income would decline under either approach with a 10% decline in sales. (Round answers to 1 decimal place, e.g. 27.5%.)

In times of falling sales, the ( automated OR current approach) would be preferred.

If there was a 10% decrease in sales, profit under the current approach would (increase OR decrease) by % compared to % under the automated approach.

e. At what level of sales would the company's net income be the same under either approach?

Sales Variable costs Contribution margin Fixed costs Operating income Current Approach $2,520,000 1,134,000 1,386,000 251,900 $1,134,100 Automated Approach $2,520,000 630,000 1,890,000 756,000 $1,134,000 Current Approach Automated Approach Contribution margin ratio % os Current Approach Automated Approach Break-even point S S Current Approach Automated Approach Margin of safety ratio % % Current Approach Automated Approach Degree of operating leverage