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 $ 202,000 $ 202,000
Less: Variable cost 97,000 45,000
Contribution margin $ 105,000 $ 157,000
Less: Fixed cost 13,000 61,000
Net operating income $ 92,000 $ 96,000

Required:
1. Calculate Lobster Trap’s break-even sales dollars before and after automation. (Round your contribution margin ratio to 4 decimal places and final answers to 2 decimal places.)

Break-Even Sales Dollars Before Automation
Break-Even Sales Dollars After Automation

2. Compute Lobster Trap’s degree of operating leverage before and after automation. (Round your answers to 4 decimal places.)

DOL Before Automation
DOL After Automation
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Homework Answers

Answer #1
  • All working forms part of the answer
  • Amounts are in $
  • Break Even in $ = Fixed Cost / Contribution margin ratio
  • Degree of operating leverage = Contribution margin / Net operating income
  • Requirement 1

Working

Before Automation

After automation

A

Contribution margin

105000

157000

B

Sales Revenue

202000

202000

C=A/B

Contribution margin ratio

51.9802%

77.7228%

D

Fixed Cost

13000

61000

E=D/C

Break Even in Sales Dollars

$25009.52

$78484.05

  • Requirement 2

Working

Before Automation

After automation

A

Contribution margin

$105000

$157000

B

Net Operating income

$92000

$96000

C=A/B

Degree of Operating Leverage

1.1413

1.6354

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