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29 Sep 2019
BYP6-2
For nearly 20 years Custom Coatings has provided painting andgalvanizing services for manufacturers in its region. Manufacturersof various metal products have relied on the quality and quickturnaround time provided by Custom Coatings and its 20 skilledemployees. During the last year, as a result of a sharp upturn inthe economy, the company's sales have increased by 30% relative tothe previous year. The company has not been able to increase itscapacity fast enough, so Custom Coatings has had to turn work awaybecause it cannot keep up with customer requests.
Top management is considering the purchase of a sophisticatedrobotic painting booth. The booth would represent a considerablemove in the direction of automation versus manual labor. If CustomCoatings purchases the booth, it would most likely lay off 15 ofits skilled painters. To analyze the decision, the company compiledproduction information from the most recent year and then prepareda parallel compilation assuming that the company would purchase thenew equipment and lay off the workers. Those data are shown below.As you can see, the company projects that during the last year itwould have been far more profitable if it had used the automatedapproach.
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
Instructions
(a)
Compute and interpret the contribution margin ratio under eachapproach.
(b)
Compute the break-even point in sales dollars under each approach.Discuss the implications of your findings.
(c)
Using the current level of sales, compute the margin of safetyratio under each approach and interpret your findings.
(d)
Determine the degree of operating leverage for each approach atcurrent sales levels. How much would the company's net incomedecline under each approach with a 10% decline in sales?
(e)
At what level of sales would the company's net income be the sameunder either approach?
(f)
Discuss the issues that the company must consider in making thisdecision.
BYP6-2
For nearly 20 years Custom Coatings has provided painting andgalvanizing services for manufacturers in its region. Manufacturersof various metal products have relied on the quality and quickturnaround time provided by Custom Coatings and its 20 skilledemployees. During the last year, as a result of a sharp upturn inthe economy, the company's sales have increased by 30% relative tothe previous year. The company has not been able to increase itscapacity fast enough, so Custom Coatings has had to turn work awaybecause it cannot keep up with customer requests.
Top management is considering the purchase of a sophisticatedrobotic painting booth. The booth would represent a considerablemove in the direction of automation versus manual labor. If CustomCoatings purchases the booth, it would most likely lay off 15 ofits skilled painters. To analyze the decision, the company compiledproduction information from the most recent year and then prepareda parallel compilation assuming that the company would purchase thenew equipment and lay off the workers. Those data are shown below.As you can see, the company projects that during the last year itwould have been far more profitable if it had used the automatedapproach.
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
Instructions
(a)
Compute and interpret the contribution margin ratio under eachapproach.
(b)
Compute the break-even point in sales dollars under each approach.Discuss the implications of your findings.
(c)
Using the current level of sales, compute the margin of safetyratio under each approach and interpret your findings.
(d)
Determine the degree of operating leverage for each approach atcurrent sales levels. How much would the company's net incomedecline under each approach with a 10% decline in sales?
(e)
At what level of sales would the company's net income be the sameunder either approach?
(f)
Discuss the issues that the company must consider in making thisdecision.
For nearly 20 years Custom Coatings has provided painting andgalvanizing services for manufacturers in its region. Manufacturersof various metal products have relied on the quality and quickturnaround time provided by Custom Coatings and its 20 skilledemployees. During the last year, as a result of a sharp upturn inthe economy, the company's sales have increased by 30% relative tothe previous year. The company has not been able to increase itscapacity fast enough, so Custom Coatings has had to turn work awaybecause it cannot keep up with customer requests.
Top management is considering the purchase of a sophisticatedrobotic painting booth. The booth would represent a considerablemove in the direction of automation versus manual labor. If CustomCoatings purchases the booth, it would most likely lay off 15 ofits skilled painters. To analyze the decision, the company compiledproduction information from the most recent year and then prepareda parallel compilation assuming that the company would purchase thenew equipment and lay off the workers. Those data are shown below.As you can see, the company projects that during the last year itwould have been far more profitable if it had used the automatedapproach.
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
Instructions
(a)
Compute and interpret the contribution margin ratio under eachapproach.
(b)
Compute the break-even point in sales dollars under each approach.Discuss the implications of your findings.
(c)
Using the current level of sales, compute the margin of safetyratio under each approach and interpret your findings.
(d)
Determine the degree of operating leverage for each approach atcurrent sales levels. How much would the company's net incomedecline under each approach with a 10% decline in sales?
(e)
At what level of sales would the company's net income be the sameunder either approach?
(f)
Discuss the issues that the company must consider in making thisdecision.
Trinidad TremblayLv2
29 Sep 2019