Casas Modernas of Juarez, Mexico, is contemplating a major change in its cost st

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 Computerized System System Sales Variable costs Contribution margin Fixed costs Net income $1,860,000 1,488,000 372,000 132,000 $240,000 $1,860,000 744,000 1,116,000 876,000 $240,000 Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.) Degree of Operating Leverage Manual System Computerized System Attempts: 0 of 4 used C Check Answer

Explanation / Answer

Degree of oeprating leverage = Contribution margin/Net income Manual system 1.55 =372000/240000 Computerized system 4.65 =1116000/240000

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