Tasty Time Cafeteria operates cafeteria food services in public buildings in the Midwest. Tasty Time is contemplating a major change in its cost structure. Currently, all of their cafeteria lines are staffed with hourly wage employees who hand serve the food to customers. Benson Riggs, Tasty Times owner, is considering replacing the employees with an automated self-service system. However, before making the change, Benson would like to know the consequences of the change, since the volume of business varies significantly from location to location. Shown below are the CVP income statements for each alternative.

Personal Service SystemAutomated Self-Service SystemSales$2,500,000$2,500,000Variable costs1,875,0001,250,000Contribution margin$625,000$1,250,000Fixed costs125,000750,000Net Income$500,000$500,000

Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 15.25.)

Personal Service SystemAutomated Self-Service SystemOperating leverage

Which alternative would produce the higher net income if sales increased by $250,000?

The

automated self-service systempersonal service system would produce the higher net income.

Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. (Round answers to 2 decimal places, e.g. 0.25.)

Personal Service SystemAutomated Self-Service SystemMargin of safety ratio

Personal service systemAutomated self-service system could sustain the greater decline in sales before operating at a loss.

Tasty Times vice president of finance has offered another option. He suggests a different system that combines personal service at key points in the cafeteria line with a less expensive automated self -service system for the other items. The financial information on this system is given below:

Blended Service SystemSales$2,500,000Variable costs1,500,000Contribution margin$1,000,000Fixed costs500,000Net Income$500,000

Determine the degree of operating leverage for this option. (Round answer to 2 decimal places, e.g. 15.25.)

Operating leverage

How much would net income increase if sales increased by $250,000? (Round answer to 2 decimal places, e.g. 15.25%.)

Net income %

Using the margin of safety ratio, how large of a decline in sales could this option sustain before operating at a loss. (Round margin of safety ratio to 2 decimal places, e.g. 0.25.)

Margin of safety ratioDecline in sales %

Which option do you recommend for Tasty Time Cafeteria?