ComfortCraft manufactures swivel seats for customized vans. It currently manufactures 20,000 seats per year, which it sells for $680 per seat. It incurs variable costs of $340 per seat and fixed costs of $4,420,000. It is considering automating the upholstery process, which is now largely manual. It estimates that if it does this, its fixed costs will be $5 million, and its variable costs will drop to $280 per seat.
Instructions
(a) Prepare a variable-costing income statement based on current activity.
(b) Calculate the contribution margin ratio, break-even point in dollars, margin of safety ratio, and degree of operating leverage based on current activity.
(c) Prepare a variable-costing income statement assuming that the company invests in the automated upholstery system.
(d) Calculate the contribution margin ratio, break-even point in dollars, margin of safety ratio, and degree of operating leverage assuming the company implements the new upholstery system.
(e) Discuss the implications of adopting the new system.