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Prepare a 7- to 9-slide Microsoft® PowerPoint® presentation illustrating your responses to the questions posed by the assigned case study.

List major points in the slides. Include detailed explanations in the speaker notes section that correlate to each point.

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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

Net income

600,000

1,000,000

A). Compute and interpret the contribution margin ratio under each approach.

The contribution margin ratio indicates how much margin is earned per dollar of sales (this is also the margin available to cover for fixed costs). Under the current approach, it has a contribution margin ratio of 40% or 40 cents to every sales dollar – this is the amount that net income will increase by or the amount available to cover for fixed costs. Under the automated approach, contribution margin ratio is 80%, higher than the current approach so it has 80 cents to every sales dollar of increase in net income. Formula: Contribution margin/Sales

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

Contribution margin ratio

40.0%

80.0%

B). Compute the break-even point in sales dollars under each approach. Discuss the implications of your findings.

The break-even sales dollar shows that level of sales at which the company can cover both its variable and fixed costs without incurring any losses. Under the current approach, break-even sales is \$500,000 while automated approach would require \$750,000 sales, this means the automated approach requires higher sales than the current approach in order to break-even. Formula: Fixed Costs/Contribution Margin Ratio

Current Approach

Automated Approach

Fixed Costs

\$ 200,000

\$ 600,000

Contribution Margin

40%

80%

Break-even point (sales dollars)

\$ 500,000

\$ 750,000

C). Using the current level of sales, compute the margin of safety ratio under each approach and interpret your findings.

The margin of safety ratio provides a range as to how much sales could drop before the company suffers a loss. Under the current approach, sales could drop up to 75% before the company will suffer a loss; the automated approach allows for 62.5% margin of safety ratio. Both approaches offer the company a higher margin of safety. Formula: Margin of Safety/actual sales

Current Approach

Automated Approach

Actual sales

2,000,000

2,000,000

Break-even sales

500,000

750,000

Margin of safety

1,500,000

1,250,000

Margin of safety ratio

75.0%

62.5%

D). Determine the degree of operating leverage for each approach at current sales levels. How much would the company’s net income decline under each approach with a 10% decline in sales? The degree of operating leverage shows how much effect operating leverage has on net income. Under the current approach, degree of operating leverage at 1.33 is lower than automated approach with DOL of 1.60; this means that any change in operating leverage, current approach would experience a 13.3% drop in net income while under the automated approach, a change in operating leverage would decrease net income by 16%.

Current Approach

Automated Approach

Contribution margin

\$ 800,000

\$ 1,600,000

Net income

\$ 600,000

\$ 1,000,000

Degree of Operating Leverage

1.33

1.60

E).At what level of sales would the company’s net income be the same under either approach? Under the current approach, the variable cost is 60% and the contribution margin is 40%, under automated approach the variable cost is 20% and the contribution margin is 80%. At this level both approaches nets the same income.

CVP formula: Sales – Variable Cost = Contribution margin – Fixed Costs = Contribution margin

Sales – (60% x Sales) – \$200,000 = Sales – (20% x Sales) – \$600,000

Sales – 0.60Sales -\$200,000 = Sales – 0.20Sales – \$600,000

0.40Sales – \$200,000 = 0.80Sales – \$600,000

0.80Sales – 0.40Sales = \$200,000 – \$600,000

0.40Sales = \$400,000

Sales = \$1,000,000

To check:

Current Approach

Automated Approach

Sales

1,000,000

1,000,000

Variable cost

600,000

200,000

Contribution margin

400,000

800,000

Fixed costs

200,000

600,000

Net income

\$ 200,000

\$ 200,000

F). Discuss the issues that the company must consider in making this decision. While it appears that the purchase of a sophisticated robotic painting booth supporting a move towards an automated approach will benefit the company’s pro

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