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Arquitectos Interiores of Juarez, Mexico, is contemplating a major change in its
cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfonso
Jiminez, Arquitectos’ owner, is considering replacing the draftsmen with a computerized
drafting system. However, before making the change, Alfonso would like to know the consequences
of the change, since the volume of business varies significantly from year to
year. Shown below are CVP income statements for each alternative.

  Manual System Computerized System
Sales  1,500,000  1,500,000
Variable costs   1,200,000  600,000
Contribution margin  300,000  900,000
Fixed costs  50,000  650,000
Net income  250,000  250,000

(a) Determine the degree of operating leverage for each alternative.
(b) Which alternative would produce the higher net income if sales increased by $150,000?
(c) Using the margin of safety ratio, determine which alternative could sustain the greater
decline in sales before operating at a loss.

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