Ivanhoe 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, Ivanhoes 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		$1,680,000		$1,680,000
Variable costs		1,344,000		672,000
Contribution margin		336,000		1,008,000
Fixed costs		96,000		768,000
Net income		$240,000		$240,000

A.

		Degree of Operating Leverage
Manual System		1.4
Computerized System		4.2

(b)

Calculate the increase in Net income for each alternative if sales increased by $142,000 due to an increase in the number of units sold.

		Increase in Net Income
Manual System		$enter a dollar amount
Computerized System		$enter a dollar amount

Which alternative would produce the higher net income? select an alternative

C. Calculate the margin of safety ratio for the original scenarios in Part a. (Round ratios to 2 decimal places, e.g. 0.25.)

		Margin of Safety ratio
Manual System		enter a value rounded to 2 decimal places
Computerized System		enter a value rounded to 2 decimal places

Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. select an alternative Computerized SystemManual System