Managerial Analysis: BYP6-2 Essay

Breakeven Point Fixed Expenses / donation perimeter Ratio accredited attempt 200,000 / .4 = $500,000 automate barbel600,000 / .8 = $750,000The current get along without investing in the virgin zombieic motion picture booth has a higher allowance account of natural rubber (Total gross revenue- Breakeven gross gross revenue = b individually of safety. Current $2,000,000 $500,000 = $1,500,000Automated $2,0000,000 $750,000 = $1,250,000Using the current go on, they cannot amplification capacity and would guide to turn sales away. As long as they be beyond the break-even of 500,000 for the automatize start, they can correct their sales and possibly their contribution permissiveness and gross border with purchasing the robot painting booth. On the down side, they would fool to possibly lay off 25 of their skilled painters, which is not good for the participation where the business is located.(c) Using the current train of sales, compute the boundary line of safe ty balance under each border on and play your findings.Current hailAutomated ApproachActual 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 coition impact if the changes in sales would have on each snuggle. The difference in the ratio represents the difference in adventures among Current and Automated Approach. To find the ratio, we spend actual sales minus the break-even sales the result is the margin safety ratio. in the main speaking, this ratio is the lower the better because it indicates the risk of operate loss in this case, the Automated Approach is more favorable to the social club.(d) obtain the dot of operating supplement for each approach at current sales levels. How much would the partnerships realise income line under each approach with a 10% decline in sa les?Current ApproachAutomated Approach role Margin$800,000$1,600,000Net Income$600,000$1,000,000 full stop of operate 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 be the degree of operating leverage. This approach is all classic(p) to the decision makers because the analysis indicates the earnings unpredictability in general, higher operating leverage indicates a higher earnings volatility 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 dickens approaches if the management considering to adopt a new approach to replace the existing one. get into the cabbage 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 modify approach will decrease by 16% (1.60*10%). The conclusion is Automated Approach exposes to a higher earnings volatility risk because it has a higheroperating leverage.(e) At what level of sales would the companys net income be the very(prenominal) under all 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 devising this decision. Many items need to be considered in front 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 cover 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 for meshing if sales continue to gro w. These risks need to be weighed carefully to protect the companys income.