Imagen Arquitectónica of Tijuana, Mexico is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftspersons. Alfredo Ayala, Imagen's owner, is considering replacing the drafts- persons with a computerized drafting system.
However, before making the change, Alfredo would like to know its consequences, 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) Calculate which alternative would produce the higher operating 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 a loss.

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Manual System Computerized System Sales Variable costs Contribution margin Fixed costs Operating income $1,500,000 $1,200,000 300,000 200,000 $ 100,000 $1,500,000 900,000 600,000 500,000 $100,000