Managerial Analysis: BYP6-2

Topics: Revenue, Contribution margin, Operating leverage Pages: 3 (673 words) Published: November 3, 2014
Managerial Analysis: BYP6-2
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Managerial Analysis: BYP6-2

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

Current approach: 800,000 / 2,000,000 = 0.4
Automated approach: 1,600,000 / 2,000,000 = 0.8

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

Breakeven Point – Fixed Expenses / Contribution Margin Ratio Current Approach: 200,000 / .4 = $500,000
Automated Approach:600,000 / .8 = $750,000

The current approach without investing in the new robotic painting booth has a higher margin of safety (Total Sales- Breakeven sales = Margin of safety. Current: $2,000,000 – $500,000 = $1,500,000

Automated: $2,0000,000 – $750,000 = $1,250,000
Using the current approach, they cannot increase capacity and would have to turn sales away. As long as they are beyond the break-even of 500,000 for the automated approach, they can improve their sales and possibly their contribution margin and gross margin with purchasing the robot painting booth. On the down side, they would have to possibly lay off 25 of their skilled painters, which is not good for the community where the business is located.

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

Current ApproachAutomated Approach
Actual Sales$2,000,000$2,000,000
Break-Even Sales$500,000$750,000
Actual Sales$2,000,000$2,000,000
Margin of Safety Ratio0.750.625

(Actual Sales- Break-Even Sales)/Actual Sales= Margin of Safety Ratio The purpose of margin of safety ratio is to evaluate the relative impact if the changes in sales would have on each approach. The difference in the ratio represents the difference in risks between Current and Automated Approach. To find the ratio, we use actual sales minus the break-even sales; the result is the margin safety ratio. Generally speaking, this ratio is...
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