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Lobster Trap Company is considering automating its manufacturing facility. Company information before and after the proposed automation follows: Before Automation After Automation Sales revenue $ 203,000 $ 203,000 Less: Variable cost 105,000 47,000 Contribution margin $ 98,000 $ 156,000 Less: Fixed cost 18,000 56,000 Net operating income $ 80,000 $ 100,000 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.

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Answer:

The break-even sales in dollars is given as follows:

Before automation=$37,285.71

After Automation   =$72,871.79

The degree of operating leverage is given as:

Before automation 1.23

After automation    1.56

Explanation:

Contribution margin ratio=contribution/sales

Contribution margin   0.48   0.77  

BREAK EVEN POINT SALES DOLLARS = FIXED COST/CONTRIBUTION MARGIN RATIO   37,285.71   72,871.79  

DEGREE OF OPERATING LEVERAGE=CONTRIBUTION/NET OPERATING INCOME                            1.225     1.56

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