For nearly 20 years, Custom Coatings has provided painting and galvanizing services for manufacturers in its region. Man

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For Nearly 20 Years Custom Coatings Has Provided Painting And Galvanizing Services For Manufacturers In Its Region Man 1 (41.13 KiB) Viewed 28 times

B) Compute the break-even point in sales dollars under each
approach
c) Using the current level of sales, compute the margin of
safety ratio under approach.
D) Determine the degree of operating leverage under 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?
For nearly 20 years, Custom 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 Custom 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 Custom Coatings has had to turn work away because it cannot keep up with customer requests. 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 labour. If Custom 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. The data are shown at right. 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 approach. Current Approach Automated Approach Sales $2,000,000 $2,000,000 Variable costs 1,200,000 400,000 Contribution margin 800,000 1,600,000 Fixed costs 200,000 600,000 Operating income $600,000 $1,000,000
(a) Calculate the contribution margin ratio under each approach. Current Approach Contribution margin ratio % Automated Approach %