Bergen Hospital is contemplating an investment in an automated surgical system.

Question

Bergen Hospital is contemplating an investment in an automated surgical system. Its current process relies on the a number of skilled physicians. The new equipment would employ a computer robotic system operated by a technician. The company requested an analysis of the old technology versus the new technology. The accounting department has prepared the following CVP income statements for use in your analysis. Old New Sales $3,108,000 $3,108,000 Variable costs 1,572,000 699,000 Contribution margin 1,536,000 2,409,000 Fixed costs 966,000 1,949,000 Net income $570,000 $460,000 (a) Compute the degree of operating leverage for the company under each scenario. (Round answers to 1 decimal place, e.g. 15.7.) Degree of operating leverage Old, New........ the first numbers are the old and the second numbers are the new.

Explanation / Answer

(a) Compute the degree of operating leverage for the company under each scenario

Degree of operating leverage = Contribution margin/net operating income

Old = 1536000/570000 = 2.7

New sales = 2409000/460000 = 5.2

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