Longview Company is considering automating its manufacturing facility. Company information before and after the proposed automation follows:

Longview Company is considering automating its manufacturing facility. Company information before and after the proposed automation follows:

	Before Automation			After Automation
Sales revenue	$	196,000		$	196,000
– Variable cost		98,000			54,000
Contribution margin	$	98,000		$	142,000
– Fixed cost		13,000			60,000
Net income	$	85,000		$	82,000

 

Requirement 1:

Calculate Longview’s break-even sales dollars before and after automation. (Round your contribution margin ratio to 4 decimal places and final answers to 2 decimal places. Omit the "$" sign in your response.)

Break-even sales dollars before automation	$ 26,000.00
Break-even sales dollars after automation	$ 82,816.90

Explanation:

Break-even sales dollars = Fixed costs / Contribution margin ratio

 

Break-even sales dollars before automation:
	=	$13,000/($98,000/$196,000)
	=	$13,000 / .5000
	=	$26,000.00 (rounded)

Break-even sales dollars after automation:

	=	$60,000/($142,000/$196,000)
	=	$60,000 / .7245
	=	$82,815.73 (rounded)
Requirement 2:
Compute Longview’s degree of operating leverage before and after automation. (Round your answers to 4 decimal places.)

 

DOL before automation	1.1500
DOL after automation	1.7300

Explanation:

Degree of operating leverage = Contribution margin / Profit

 

DOL before automation:
	=	$98,000/$85,000
	=	1.1529 (rounded)

 

DOL after automation:
	=	$142,000/$82,000
	=	1.7317 (rounded)