Exercise 6-15 Casas Modernas of Juarez, Mexico, is contemplating a major change
ID: 2554821 • Letter: E
Question
Exercise 6-15 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. Manual System Computerized System Sales Variable costs Contribution margin Flxed 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 Determine the degree of operating leverage for each alternative. (Round answers to 2 declmal places, e.g. 1.25.) Degree of Operating Leverage Manual System Computerized SystemExplanation / Answer
Manual Computerized Sales 1720000 1720000 Less: Variable Cost 1376000 688000 Contribution Margin 344000 1032000 Fixed cost 114667 802667 Net Income 229333 229333 Req a: Degree of Operating leverage 1.5 4.5 (Contribution / Net Income) Req b: Increase in Sales: $ 118,000 % Increase in sales (118000/1720000*100): 6.86% % Increase in Net Income Manual (6.86*1.5) 10.29% Computerized(6.86*4.50) 30.87% Increase in Net Income: Manual (229,333*10.29%) 23598 Computerized (229333*30.87%) 70795 Compterized System will higher net income Req C: Manual Computerized Sales 1720000 1720000 Less: Variable Cost 1376000 688000 Contribution Margin 344000 1032000 Fixed cost 114667 802667 Net Income 229333 229333 CM ratio 20% 60% (Contribution/Sales*100) Margin of Safety in $ 1146665 382221.7 (Net Income/CM ratio) % of Margin of sales to Sales 66.67% 22.22% Using MOS, Manual system will sustain decline in sales before operating a loss.