seat. It incurs unit variable costs of $$200$ per seat and fixed costs of $$2,000,000.$ It is considering automating the upholstery process, which is now largely manual. It estimates that if it does so$,$ its fixed costs will be $$3,000,000,$ and its unit variable costs will decline to $$100$ per seat.

The contribution margin ratio, break$-$even point in sales dollars, margin of safety ratio, and degree of operating leverage based on current activity are as follows:

Contribution margin ratio $60\mathrm{.}00\%$

Break$-$even point in dollars $$3,333,333$

Margin of safety ratio

$33\mathrm{.}30\%$

Degree of operating leverage

$3\mathrm{.}00$

Assuming the new upholstery system is implemented the contribution margin ratio, break$-$even point in sales dollars, margin of safety ratio, and degree of operating leverage are as follows:

Contribution margin ratio

$80\mathrm{.}00\%$

Break$-$even point in dollars

$$3,750,000$

Margin of safety ratio

$25\mathrm{.}00\%$

Degree of operating leverage

$4\mathrm{.}00$

Discuss the implications of adopting the new system