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 System Computerized System Sales Variable costs Contribution margin Fixed costs Net income $1,720,000 1,376,000 344,000 114,667 $229,333 $1,720,000 688,000 1,032,000 802,667 $229,333 (a) 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

Explanation / Answer

Degree of operating leverage = Contribution margin/Net income Manual system 1.50 =344000/229333 Computerised system 4.50 =1032000/229333

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