For nearly 20 years Custom Coatings has provided painting and galvanizing servic
ID: 2373544 • Letter: F
Question
For nearly 20 years Custom 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 Custom 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 Custom Coatings has had to turn work away because it cannot keep up with customer requests.
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Explanation / Answer
(a)
Contribution margin
800,000
1,600,000
Compute and interpret the contribution margin ratio under each approach.
Current approach = 800000/2000000 = 40%
Automatic approach = 1600000/2000000 = 80%
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(b)
Compute the break-even point in sales dollars under each approach. Discuss the implications of your findings.
Breakeven in sales dollar Current approach = 200000/0.4 = $500,000
Automatic approach = 600000/0.8 = $750,000
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(c)
Using the current level of sales, compute the margin of safety ratio under each approach and interpret your findings.
Current approach = (2000000-500000)/2000000 = 75%
Automatic approach = (2000000 - 750000)/2000000 = 62.50%
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(d)
Determine the degree of operating leverage for each approach at current sales levels. How much would the company's net income decline under each approach with a 10% decline in sales?
Current approach = 200000/1400000 = 14.29%
Automatic approach = 600000/1000000 = 60%
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(e)
At what level of sales would the company's net income be the same under either approach?
Current approach = 800,000 x 0.9 - 200000 = $520,000
= $600000 - 520000 = $80000Decline)
Automatic approach = 1600000 x 0.9 - 600000 = $840000
=1000000-840000 = $160000(Decline )
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