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		$1,620,000		$1,620,000
Variable costs		1,296,000		648,000
Contribution margin		324,000		972,000
Fixed costs		84,000		732,000
Net income		$240,000		$240,000

(b) Calculate the increase in Net income for each alternative if sales increased by $140,000.

		Increase in Net Income
Manual System		$
Computerized System		$

Which alternative would produce the higher net income:   

Computerized System or Manual System?

(c) Calculate the margin of safety ratio. (Round ratios to 2 decimal places, e.g. 0.25.)

		Margin of Safety ratio
Manual System
Computerized System

Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.                                                                       Computerized System or Manual System?

Answer 1