For nearly 20 years, Custom 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 Custom Coatings and its 20 skilled employees. During the last 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 Custom 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 Custom 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. The data are shown at right. 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.

For nearly 20 years, Custom 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 Custom Coatings and its 20 skilled employees. During the last 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 Custom Coatings has had to turn work away because it cannot keep up with customer requests.

	Current Approach			Automated Approach
Sales		$2,000,000			$2,000,000
Variable costs		1,200,000			400,000
Contribution margin		800,000			1,600,000
Fixed costs		200,000			600,000
Operating income		$600,000			$1,000,000

Determine the degree of operating leverage for each approach at current sales levels. (Round answers to 2 decimal places, e.g. 2.75.) Current Approach Automated Approach Degree of operating leverage 1.33 1.60 Calculate how much the company's operating income would decline under either approach with a 10% decline in sales. (Round answers to 1 decimal place, eg. 27.5%.) In times of falling sales, the approach would be preferred. If there was a 10% decrease in sales, profit under the current approach would by % compared to % under the automated approach