For nearly 20 years, Sandhill 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 Sandhill 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 Sandhill 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 Sandhill 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.

		Current Approach			Automated Approach
Sales		$1,960,000			$1,960,000
Variable costs		1,176,000			392,000
Contribution margin		784,000			1,568,000
Fixed costs		196,000			588,000
Operating income		$588,000			$980,000

A) 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

B)Calculate how much the companys operating income would decline under either approach with a 10% decline in sales. (Round answers to 2 decimal place, e.g. 27.50%.) (Fill in the blacks and select the correct option when needed)

In times of falling sales, the __________(Automated or Current) approach would be preferred.

If there was a 10% decrease in sales, operating income under the current approach would______(Decrease or Increase) by_________% compared to ________% under the automated approach.

C)Determine at what level of sales the companys operating income would be the same under either approach.

Level of sales$___________