Reference no: EM131079457

Exercise (Part Level Submission)

Casas 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, Casas' 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	$1,590,000	$1,590,000
Variable costs	1,272,000	636,000
Contribution margin	318,000	954,000
Fixed costs	106,000	742,000
Net income	$212,000	$212,000

(a) Determine the degree of operating leverage for each alternative.

(b)

i. Calculate the increase in Net income for each alternative if sales increased by $137,000.

ii. Which alternative would produce the higher net income ? Computerized SystemManual System

(c) Calculate the margin of safety ratio.