Question

Lobster Trap Company is considering automating its manufacturing facility. Company information before and after the proposed...

Lobster Trap Company is considering automating its manufacturing facility. Company information before and after the proposed automation follows:

Before Automation After
Automation
Sales revenue $ 195,000 $ 195,000
Less: Variable cost 104,000 56,000
Contribution margin $ 91,000 $ 139,000
Less: Fixed cost 14,000 56,000
Net operating income $ 77,000 $ 83,000

Required:

1. Calculate Lobster Trap’s break-even sales dollars before and after automation.

2. Compute Lobster Trap’s degree of operating leverage before and after automation.

Business   Accounting   
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Homework Answers

Answer #1

Break even sales = Fixed cost/Contribution margin ratio

Contribution margin ratio before automation = 91,000/195,000

= 46.6667%

Contribution margin ratio after automation = 139,000/195,000

= 71.2821%

Breakeven sales before automation

= 14,000/46.6667%

 29,999.98

Breakeven sales after automation

= 56,000/71.2821%

 78,561.10

Degree of operating leverage = Contribution margin/Net income

Dol before automation 1.1818
Dol after automation 1.6747
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