Imagen Arquitectnica of Tijuana, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftspersons. Alfredo Ayala, Imagens owner, is considering replacing the draftspersons with a computerized drafting system. However, before making the change, Alfredo would like to know its consequences, 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			$1,100,000				$1,100,000
Variable costs			880,000				660,000
Contribution margin			220,000				440,000
Fixed costs			110,000				330,000
Operating income			$110,000				$110,000

Determine the degree of operating leverage for each alternative. (Round answer to 2 decimal places, e.g. 15.25.)

		Operating leverage
Manual System		enter the degree of operating leverage rounded to 2 decimal places
Computerized System		enter the degree of operating leverage rounded to 2 decimal places

Calculate which alternative would produce the higher operating income if sales increased by $110,000.

select an alternative Computerized SystemManual System

would produce a higher operating income.

Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. (Round margin of safety ratio to 2 decimal places, e.g. 15.25%.)

		Margin of Safety Ratio
Manual		enter percentages rounded to 2 decimal places %
Computerized		enter percentages rounded to 2 decimal places %

select an alternative Computerized SystemManual System

could sustain the greater decline in sales before operating at a loss.