ComfortCraft manufactures swivel seats for customized vans. It currently manufactures 10,000 seats per year, which it sells for $480 per seat. It incurs variable costs of $180 per seat and fixed costs of $2,200,000. It is considering automating the upholstery process, which is now largely manual. It estimates that if it does so, its fixed costs will be $3,200,000, and its variable costs will decline to $80 per seat.
Instructions
With the class divided into groups, answer the following questions.
(a) Prepare a CVP income statement based on current activity.
(b) Compute contribution margin ratio, break even point in dollars, margin of safety ratio, and degree of operating leverage based on current activity.
(c) Prepare a CVP income statement assuming that the company invests in the automated upholstery system.
(d) Compute contribution margin ratio, break even point in dollars, margin of safety ratio, and degree of operating leverage assuming the new upholstery system is implemented.
(e) Discuss the implications of adopting the new system.
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