Managerial Analysis BYP6-2 For nearly 20 years, Specialized Coatings has provide

Question

Managerial Analysis BYP6-2 For nearly 20 years, Specialized Coatings has provided painting and galvanizing services for manufacturers in its region. Manufacturers of various metal products have relied on the quality and quick turnaround time provided by Specialized Coatings and its 20 skilled employees. During the last year, as a result of a sharp upturn in the economy, the company's sales have increased by 30% relative to the previous year. The company has not been able to increase its capacity fast enough, so S Coatings has had to turn work away because it cannot keep up with customer requests. pecial- Top management is considering the purchase of a sophisticated robotic painting booth. The booth would represent a considerable move in the direction of automation versus manual labor. If Specialized Coatings purchases the booth, it would most likely lay off 15 of its skilled painters. To analyze the decision, the company compiled production information from the most recent year and then prepared a parallel compilation assuming that the company would purchase the new equipment and lay off the workers. Those data are shown below. As you can see, the company projects that during the last year it would have been far more profitable if it had used the automated Sales Variable costs Contribution margin $2,000,000 1,500,000 500,000 380,000 $ 120,000 $2,000,000 1,000,000 1,000,000 800,000 200,000 Fixed costs Net income Instructions (a) Compute and interpret the contribution margin ratio under each approach. (b) Compute the break-even point in sales dollars under each approach. Discuss the implications of your findings. (e) Using the current level of sales, compute the margin of safety ratio under each approach and interpret your findings. (d) Determine the degree of operating leverage for each approach at current sales levels. How much would the company's net income decline under each approach with a 10% decline in sales? (e) At what level of sales would the company's net income be the same under either approach? (D) Discuss the issues that the company must consider in making this decision.

Explanation / Answer

Current Approach Automated Approach Sales 2000000 2000000 Less : Variable cost 1500000 1000000 Contribution Margin 500000 1000000 Less : Fixed costs 380000 800000 Net Income 120000 200000 Net Income % on Sale 6% 10% P/V Ratio 25% 50% Break Even Point 1520000 1600000 F In the given Scenario, Firstly, Company should must consider the issue of Contribution margin.i.e. P/V Ratio. So, through evaluation of Contribution in both approach, we found that P/V ratio under Automated approach is much higher than P/V ratio under current approach. Also, sharp upturn in the economy & company sales have increased by 30% relative to the previous year, specialized coatings under current approach had to turn away because it cannot keep with it customer requests. Secondly, Company should consider the issue of percentage of Net Income on Sales. So, through, computation of Percentage of Net Income on sales under both approach, we found that such percentage under automated approach is higher than current approach. However, through use of automated approach, it would most likely lay off 15 of its skilled painters under the manual approach. Thus, it implies purchase of new equipment and lay off the workers.

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