Broadening Your Perspective 6-2 (Part Level Submission) For nearly 20 years, Spe
ID: 2537852 • Letter: B
Question
Broadening Your Perspective 6-2 (Part Level Submission) For nearly 20 years, Speciakzed Coatings has provided painting and galvaniaing services for manufacturers in its region. Marofacturers of various metal products have relied on the quality and quick turnaround tiame provided by Specialized Coatings and its 20 skiled enployees. During the last year as a rmult of a sharp uptum n the econo w the coroany's tales have inereased by 30% rethe t the previ e mt rhe fred y bas et ben hiewee ts capacity fast enough, so Specialized Coalings has had to turn work away because it cannot keep up with customer requets. Top management is considering the parchase of a sophisticated robotik painting booth. The booth would represent a corsiderable move in the direction of automation versus manual labor. 1f Specialized Coudings parchases the booth, a would most likely lay oft 15 of its skilled painters. To analyne the decision, the company compiled production Information from the mest recent year and then prepared a paralled compilation assuming that the company would purchase Current Automated Approach Appreach $1,760,000 $1,760,000 1,320,000 ,000 Centribution margin 440,000 880,000 Fixed costs Net income $106,000 $176,000 (ai) Compute the contribution margie ratio under each approach.(Round ratios to 0 decimal places, e.g. 1s Current approach Automated approach Contribution margin ratio Attempts: 0 e 2 uved SAVE FOR LATERExplanation / Answer
Answer to Part a1.
Contribution Margin Ratio = Contribution Margin / Sales
Current Approach:
Contribution Margin Ratio = $440,000 / $1,760,000
Contribution Margin Ratio = 25%
Automated Approach:
Contribution Margin Ratio = $880,000 / $1,760,000
Contribution Margin Ratio = 50%
Answer to Part b1.
Break Even Point in Sales Dollars = Fixed Cost / Contribution Margin Ratio
Current Approach:
Break Even Point in Sales Dollars = $334,000 / 0.25
Break Even Point in Sales Dollars = $1,336,000
Automated Approach:
Break Even Point in Sales Dollars = $704,000 / 0.50
Break Even Point in Sales Dollars = $1,408,000
Answer to Part c1.
Current Approach:
Break Even Point in Sales Dollars = $1,336,000
Sales = $1,760,000
Margin of Safety Ratio = (Sales - Breakeven Point) / Sales
Margin of Safety Ratio = ($1,760,000 - $1,336,000) / $1,760,000
Margin of Safety Ratio = 24.09%
Automated Approach:
Break Even Point in Sales Dollars = $1,408,000
Sales = $1,760,000
Margin of Safety Ratio = (Sales - Breakeven Point) / Sales
Margin of Safety Ratio = ($1,760,000 - $1,408,000) / $1,760,000
Margin of Safety Ratio = 20.00%
Answer d.
Current Approach:
Degree of Operating Leverage = Contribution Margin / Net income
Degree of Operating Leverage = $440,000 / $106,000
Degree of Operating Leverage = 4.15
Automatic Approach:
Degree of Operating Leverage = Contribution Margin / Net income
Degree of Operating Leverage = $880,000 / $176,000
Degree of Operating Leverage = 5.00
If Sales decreases by 10%:
Current Approach:
Degree of Operating Leverage = 4.15
% Change in Net Income / % Change in Sales = 4.15
% Change in Net Income / -10% = 4.15
% Change in Net Income = -41.50%
Automatic Approach:
Degree of Operating Leverage = 5.00
% Change in Net Income / % Change in Sales = 5.00
% Change in Net Income / -10% = 5.00
% Change in Net Income = -50.00%
Answer e.
Let Net Income under both approach will be same when sales is $X
Current Approach:
Contribution Margin Ratio = 25%
Fixed Expenses = $334,000
Net Income = $X * 25% - $334,000
Automatic Approach:
Contribution Margin Ratio = 50%
Fixed Expenses = $704,000
Net Income = $X * 50% - $704,000
$X * 25% - $334,000 = $X * 50% - $704,000
$370,000 = $X * 25%
$X = $1,480,000
So, Net income under both approach will be same when sales is $1,480,000
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