Managerial Analysis: BYP6-2 Essay

Breakeven Point Fixed Expenses / Contribution Margin Ratio authoritative Approach 200,000 / .4 = $500,000Automated Approach600,000 / .8 = $750,000The certain start without investing in the tonic robotic painting booth has a higher margin of safety (Total Sales- Breakeven gross revenue = Margin of safety. catamenia $2,000,000 $500,000 = $1,500,000Automated $2,0000,000 $750,000 = $1,250,000Using the current approach, they cannot increase capacity and would beget to turn sales away. As long as they are beyond the break-even of 500,000 for the automatize approach, they can improve their sales and possibly their contribution margin and bring in 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 company where the business is located.(c) Using the current level of sales, compute the margin of safety proportionality under each(prenominal) approach and interpret your findi ngs.Current ApproachAutomated Approach real(a) Sales$2,000,000$2,000,000Break-Even Sales$500,000$750,000Actual Sales$2,000,000$2,000,000Margin 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 put on the lines 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 the lower the better because it indicates the risk of operating loss in this case, the Automated Approach is more favorable to the company.(d) Determine the degree of operating leverage for each approach at current sales levels. How much would the companys unclutter income decline under each approach with a 10% decline in sales?Current ApproachAutomated ApproachContribution Ma rgin$800,000$1,600,000Net Income$600,000$1,000,000Degree of Operating Leverage1.331.60Contribution Margin/ Net Income= Degree of Operating Leverage We find the degree by using contribution margin / Net Income of each approach the results are the degree of operating leverage. This approach is important to the decision makers because the analysis indicates the earnings excitability in general, higher operating leverage indicates a higher earnings capriciousness risk. The degree of operating leverage is an important tool aiming the company to know the behaviors of its competitors as well as the comparison of two approaches if the management exacting to adopt a new approach to replace the existing one. Assume the net income of each approach decline with a 10% decline in sales, the net income under Current Approach will reduce by 13.3% (1.33*10%), and the net income under the automated approach will decrease by 16% (1.60*10%). The conclusion is Automated Approach exposes to a higher e arnings volatility risk because it has a higheroperating leverage.(e) At what level of sales would the companys net income be the same under either approach?The level of sales that the companys net income would be the same under either approach is $1,000,000. .6x + 200,000 = .2x + 600,000.8x = 800,000x = $1,000,000(f) Discuss the issues that the company must consider in making this decision. Many items need to be considered before the company makes a decision. The automated approach has a lower margin of safety should sales decline meaning the company would lose money quicker than if it remain under the original approach. The operating leverage is also higher under the automated approach. All of the calculations indicate a greater risk to the company under the automated approach, but as often happens this is the approach that also offers the greatest potential difference for profits if sales continue to grow. These risks need to be weighed carefully to protect the companys income.