Determine the degree of operating leverage

Reference no: EM131954903

Question: 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 $1,500,000 $1,500,000

Variable costs 1,200,000 600,000

Contribution margin 300,000 900,000

Fixed costs 100,000 700,000

Net income $200,000 $200,000

Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.) Degree of Operating Leverage, find for the manuel system and computerized system.

Manual System

Computerized System

Reference no: EM131954903

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