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

Determine the degree of operating leverage for each alternative.

Manual system=

Computerized system=

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.

Manual system=

Computerized system=

Calculate the margin of safety ratio for the original scenarios in Part a

Manual system=

Computerized system=