Shanahan Co. of Dublin, Ireland is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Mike Shanahan the owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Mike 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		$	1,500,000				$	1,500,000
Variable costs			1,200,000					900,000
Contribution margin			300,000					600,000
Fixed costs			150,000					450,000
Net income		$	150,000				$	150,000

Determine the degree of operating leverage for each alternative.

		Degree of Operating Leverage
Manual system
Computerized system

Which alternative would produce the higher net income if sales increased by $300,000?

Choose your answer here Computerized SystemManual System