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.

Exercise 20-15 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. Computerized Manual sten stem Sales Variable costs Contribution margin Fixed costs Net income $1,530,000 1,224,000 306,000 94,966 $211,034 $1,530,000 612,000 918,000 706,966 $211,034 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 4.35 LINK TO TEXT Calculate the increase in Net income for each alternative if sales increased by $142,000 Increase in Net Income Manual System Computerized System

Explanation / Answer

a)DOL=contribution margin/netincome
Manual system=306000/211034=1.45
Computerized system=918000/211034=4.35

DOL=% chnage in net income/%change in sales
% chnage in sales=(142000/1530000)=9.28%
% chnage in net income:
Manual=1.45*9.28%=13.46%
increase in net income=13.46%*211034=28397
Computerized=4.35*9.28%=40.37%
increase in net income=(40.37%)*211034=85200
We should chose computerized system

margin of safety= (current sales-breakeven sales)/current slaes

Breakeven sales for manual=(fixed cost)/(CM ratio)
=94966/(306000/1530000)
=474830
for computerized=706966/(918000/1530000)
=1178276.67

margin of safety for manula=(1530000-474830)/1530000
=68.97%
computerized=(1530000-1178276.67)/1530000
=22.99%

we choose manual

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