VI. (6) Shanahan Co. of Dublin, Ireland is contemplating a major changp af of ds

Question

VI. (6) Shanahan Co. of Dublin, Ireland is contemplating a major changp af of ds drafting work is performed by skiled drafismen. Mik replacing the draftsmen with a computerized drafting system. in iks cost structure Shanahan the owner is However, before making the change, Mike would like to knovw since the volume of business varies significantly from year the consequences of the change. to year. Shown below are CVP statements for each alternative Manual System Computerized System Sales Variable costs Contribution margin Fixed costs $1,500,000 $1,500,000 300,000 150.000 600,000 450.000 Net income Show and label al calculations Instructions (a) Determine the degree of operating leverage for each alternative. (b) Which alternative would produce the higher net income if sales increased by $300,00 Explai n why. (No calculations are necessary but you may if you wish)

Explanation / Answer

Q1. Manual System: Contribution margin 300000 Divide: Net Income 150000 Degree of Operating leverage 2 Computerized System: Contribution margin 600000 Divide: Net Income 150000 Degree of Operating leverage 4 Req b: When sales increase by $ 300000 i.e. 20% Profits increase in Manual system is 40% (i.e. 20%*2) Profits increase in Computerized System is 80% (i.e. 20%*4) Hence, the profits increased more in Computerized system.

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