Determine degree of operating leverage for each alternative

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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.

Reference no: EM131079457

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