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.

	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
Instructions
(a)	Determine the degree of operating leverage for each alternative.
(b)	Which alternative would produce the higher net income if sales increased by $300,000?
	Contribution Margin		Net Income	=	Degree of
					Operating Leverage
Manual system
Computerized system