Question

Expand Your Critical Thinking 19-02 ai, bi, ci, d-e 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 Specialized 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 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 approach. Sales Variable costs Contribution margin Fixed costs Net income Current Approach $2,110,000 1,562,500 527,500 395,625 $131,875 Automated Approach $2,110,000 1,055,000 1,055,000 844,000 $211,000 Your answer is correct. Compute the contribution margin ratio under each approach. Current approach Contribution margin ratio 1 25 1 Automated approach 5 0 LINK TO TEXT Your answer is correct. Compute the break-even point in sales dollars under each approach. Current approach 1582500 1 Automated approach 11588000 Break-even points in sales dollars LINK TO TEXT x Your answer is incorrect. Try again. Using the current level of sales, compute the margin of safety ratio under each approach. Current approach Automated approach Margin of safety ratio T 527500 422000

Answer 1

Margin of safety under current approach=( current sales- break even point)/ current sales= (2110000-1582500)/2110000=.25 or 25%

Margin of safety under automated approach= (2110000-1688000)/2110000= 20%

Sales after 10% decrease= 1899000

Net income= decreased sales*contribution margin - fixed cost

Net income under current approach= 1899000*25%- 395625= 79125

Net income under automated approach= 1899000*50%-844000= 105500

For Calculating sales which will give equal income under both the approach we will solve following equation

Let sales be A

(Sales * contribution margin under current approach)- fixed cost under current approach= (sales* contribution margin under automated approach)- fixed cost under automated approach

A *.25-395625= A*.50-844000

.5A- .25A= 844000-395625

.25A= 448375

A= 448375/.25= 1793500

Therefore at $ 1793500 sales income under both approach will be same