Exercise 6-15 (Part Level Submission) Manual System Computerized System (a) Degr
ID: 2463242 • Letter: E
Question
Exercise 6-15 (Part Level Submission)
Manual
System
Computerized
System
(a)
Degree of Operating Leverage
LINK TO TEXT
(b)
Increase in Net Income
LINK TO TEXT
(c)
Margin of Safety ratio
Exercise 6-15 (Part Level Submission)
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
(a)
Your answer is correct. 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 SystemLINK TO TEXT
Attempts: 1 of 3 used(b)
Your answer is correct. Calculate the increase in Net income for each alternative if sales increased by $137,000.Increase in Net Income
Manual System Computerized SystemWhich alternative would produce the higher net income ? Computerized SystemManual System
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Attempts: 2 of 3 used(c)
Calculate the margin of safety ratio. (Round ratios to 2 decimal places, e.g. 0.25.)Margin of Safety ratio
Manual System Computerized SystemExplanation / Answer
Manual system computerized % of variable cost system Sales 1590000 1590000 Variable cost 1272000 636000 80 40 Contribution margin 318000 954000 Fixed Cost 106000 742000 net income 212000 212000 a) Degree of operating Leverage = Contribution Margin / Operating Income Manual System Degree of operating leverage = 318000 / 212000 = 1.5 Computerized System Degree of operating leverage = 954000 / 212000 = 4.5 b) If sales will increase by $ 137000 Manual system computerized system Sales 1727000 1727000 Variable cost 1381600 690800 based on variable cost % as calculated above (1727000*80%) (1727000*40%) Contribution margin 345400 1036200 Fixed Cost 106000 742000 net income 239400 294200 Increase in net Income 27400 82200 (239400-212000) (294200-212000) c) Break even point ( in sales) Manual system computerized based on (a) above system Contribution required for break even sales 106000 742000 Contribution % 20% 60% Variable cost 80% 40% Break even Sales required 530000 1236666.67 ( 106000 / 20%) (742000/60%) Margin of safety ratio 0.67 0.22 Manual System Margin of safety Ratio = (Actual Sales - Break even sales) / Actual Sales = ( 1590000 - 530000) / 1590000 = 0.67 Computerised system Margin of safety Ratio = (Actual Sales - Break even sales) / Actual Sales = ( 1590000 - 1236666.67) / 1590000 = 0.22