Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its

Question

Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfonso Jiminez, Arquitectos' owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change, Alfonso 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 $1,688,000 675,2) Sales Variable costs Contribution margin Fixed costs Net income $1,688,000 1,350,400 337,600 104,772 $232,828 779,972

Explanation / Answer

Compute the varaible cost ratio Variable cost ratio for manual system = 1350400/1688000 = 80% Variable cost ratio for Computerized system = 675200/1688000 = 40% Particulars Manual System Computerized system Sales(1688000+122000) 1810000 1810000 Variable cost (80% for manual, 40% for computerized) 1448000 724000 Contribution margin 362000 1086000 Fixed Costs 104772 779972 Net Income(New) 257228 306028 Net Income (Old) 232828 232828 Increase in Net Income 24400 73200

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