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)
|
|
