NEXT Question 1 ntemplating a major change in its cost structure. Currenty, all

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NEXT Question 1 ntemplating a major change in its cost structure. Currenty, all of its drafting work is performed by skilled draftsmen. Rafael drafting system. However, before making the change, Rafael would like to know year. Shown below are CVP income statements for each alternative. s Modernas of Juarez, Mexico, is Jiminez, Casas' owner, is considering replacing the draftsmen with a computeri the consequences of the change, since the volume of business varies significantly from year to Manual System Computerized System Sales Variable costs Contribution margin Fixed costs Net income $1,400,000 1,120,000 280,000 64,615 $215,385 $1,400,000 560,000 840,000 624,615 $215,385 e the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 1.25.) Degree of Operating Leverage Manual System Calculate the increase in Net income for each alternative if sales increased by $140,000 ed. A Division of lohn Wiley acBoo

Explanation / Answer

Answer of Part 1:

For Manual System:

Degree of Operating Leverages = Contribution Margin / Net Income
Degree of Operating Leverages = $280,000 / $215,385
Degree of Operating Leverages = 1.3

For Computerized System:

Degree of Operating Leverages = Contribution Margin / Net Income
Degree of Operating Leverages = $840,000 / $215,385
Degree of Operating Leverages = 3.9     

Answer of Part 2:

For Manual System:

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $280,000 / $1,400,000
Contribution Margin Ratio = 20%

Increase in Net income = Contribution Margin ratio * Increase in sales
Increase in Net Income = 20%*$140,000
Increase in Net Income = $28,000

For Computerized System:

Contribution Margin Ratio = Contribution Margin / Sales
Contribution Margin Ratio = $840,000 / $1,400,000
Contribution Margin Ratio = 60%

Increase in Net income = Contribution Margin ratio * Increase in sales
Increase in Net Income = 60%*$140,000
Increase in Net Income = $84,000

Answer of Part 3:

For Manual System:

Break Even sales = Fixed costs / Contribution margin ratio
Break Even Sales = $64,615 / 0.20
Break Even Sales = $323,075

Margin Safety Ratio = Sales – Break Even sales
Margin of Safety Ratio = $1,400,000 - $323,075
Margin of Safety = $1,076,925

For Computerized System:

Break Even sales = Fixed costs / Contribution margin ratio
Break Even Sales = $624,615 / 0.60
Break Even Sales = $1,041,025

Margin Safety Ratio = Sales – Break Even sales
Margin of Safety Ratio = $1,400,000 - $1,041,025
Margin of Safety = $358,975

Answer to Part 4:

Manual System

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