Reference no: EM132941343

Question - For nearly 20 years, Specialized Coatings has provided painting and galvanizing services for manufacturers in its region. Manufacturers of various metal products have relied on the quality and quick turnaround time provided by Specialized Coatings and its 20 skilled employees. During the last year, as a result of a sharp upturn in the economy, the company's sales have increased by 30% relative to the previous year. The company has not been able to increase its capacity fast enough, so Specialized Coatings has had to turn work away because it cannot keep up with customer requests.

Top management is considering the purchase of a sophisticated robotic painting booth. The booth would represent a considerable move in the direction of automation versus manual labor. If Specialized Coatings purchases the booth, it would most likely lay off 15 of its skilled painters. To analyze the decision, the company compiled production information from the most recent year and then prepared a parallel compilation assuming that the company would purchase the new equipment and lay off the workers. Those data are shown below. As you can see, the company projects that during the last year it would have been far more profitable if it had used the automated approach.

Current

Approach

Sales $1,900,000

Variable costs 1,520,000

Contribution margin 380,000

Fixed costs 285,000

Net Income 95,000

Automated

Approach

Sales $1,900,000

Variable costs 1,045,000

Contribution margin 855,000

Fixed costs 692,550

Net income $162,450

How much would the company's net income decline under each approach with a 10% decline in sales?