Broadening Your Perspective 20-2 (Essay) for nearty 20 years, Specislized Coatin

Question

Broadening Your Perspective 20-2 (Essay) for nearty 20 years, Specislized Coatings has provided painting and galvanizing services for manufacturers in its region. Manufacturers of verious metal preducts have relled on the quality and quick turnaround time provided by Specatred Coat ngs and its 20 skiled employees. During the 'ast ytat mun efasharirtuninthe oconomy, the m pame tales have increased by 30% reserve to the pmos The has able to increane es capacity fest enough, so Specialized Coatings has had to sum work away because t cannot keep up with austomer requests Top management is considering the purchase af a sophisicated roboc painting tooth. The booth would represent a considerable move in the direction of automation versus manual labor if Specialized Coatings purchases the would purchase the new equipment and lay of the workers. Those deta are shown below. As you can see, the company prejects that during the last year it wouid heve been far more proftcable f t had used the aueomated CurrentAutomated Appreach Approach Sales Variable costs xed couts Net noome 2000,000 $2,000,00 1,50,000 1,000,300 Contribution margn 500,0001,000,000 .000800,00 the margn of safety rabo under each aoproacn

Explanation / Answer

Answer 1. Contribution Margin Ratio = Contribution / Sales Current Approach Automatic Approach Contribution        500,000.00    1,000,000.00 Sales    2,000,000.00    2,000,000.00 Contribution Margin Ratio 25% 50% Contribution Margin Ratio - is the ratio of contribution margin to net sales. It shows what percentage of sales is available to cover the fixed cost and generate revenue. Answer 2. BEP (In $) = Fixed Cost / Contribution Margin Ratio Current Approach Automatic Approach Fixed Costs        380,000.00        800,000.00 Contribution Margin Ratio 25% 50% BEP (In $)    1,520,000.00    1,600,000.00 Break Even Point - is a point of sales where total cost is equal to total revenue. It shows at which point the company will start generating profits. Answer 3. Margin of Safety Ratio = (Sales - BEP(in$)) / Sales Current Approach Automatic Approach Sales    2,000,000.00    2,000,000.00 BEP (In $)    1,520,000.00    1,600,000.00 Margin of Safety Ratio 24% 20% Margin of Safety - is the difference between actual sales and break even sales. In other words, all sales revenue above the break-even point represents the margin of safety. Answer 4. The issues that the company consider in making the decisions are: 1. By doing automation, the company had to retire many workers. The implication for the retirement of workers / labors like Government Regulations, payment of gratuity, pension etc, to the workers. 2. The reliability and quality of the finished product that is prduced by the machine is equal or better than the goods produced with labor.

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