Imagen Arquitectonica of Tijuana, Mexico, is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfredo Ayala, Imagen€™s owner, is considering replacing the draftsmen with a computerized drafting system. However, before making the change Alfredo would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Instructions
(a) Determine the degree of operating leverage for each alternative.
(b) Which alternative would produce the higher net income if sales increased by $100,000?
(c) Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at aloss.

Transcribed Image Text:

Manual System $1,500,000 1,200,000 Computerized System Sales Variable costs Contribution margin Fixed costs Net income $1,500,000 600,000 900,000 660,000 300,000 60,000 240,000 240,000