Imagen Arquitectonica of Tijuana, Mexico is contemplating a major change in its cost structure

E6-15 Imagen Arquitectonica of Tijuana, Mexico is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Alfredo Ayala, Imagen's owner, is considering replacing the draftsmen with a computerized drafting system.

However, before making the change Alfredo would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Manual System Computerized System
Sales $1,500,000 $1,500,000
Variable costs 1,200,000 600,000
Contribution margin 300,000 900,000
Fixed costs 60,000 660,000
Net income $240,000 $240,000

Instructions
a. Determine the degree of operating leverage for each alternative
b. Which alternative would produce the higher net income if sales increase by $100,000.
c. Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss.

Click here for the solution: Imagen Arquitectonica of Tijuana, Mexico is contemplating a major change in its cost structure

The chapter talks about Delphi Company reducing its other postretirement benefits by approximately $500 million because of a change in the law

14-43 The chapter talks about Delphi Company reducing its other postretirement benefits by approximately $500 million because of a change in the law. The federal government will reimburse companies for prescription drug benefits that they provide to their employees who are of Medicare age. The reimbursement is 28% of all prescription drug benefits in excess of $250 per person per year, up to a maximum of $1,300 per person.

Required
a. Identify the process the company would use to identify the liability for postretirement drug benefits. Assume this was done prior to the new federal law. Identify the data the company would need to make the estimate. Identify how the auditor might audit the data.
b. Explain how the auditor would verify the $500 million reduction in liability due to the new federal law.

Click here for the solution: The chapter talks about Delphi Company reducing its other postretirement benefits by approximately $500 million because of a change in the law

The empirical evidence reveals that very few firms change their standard prices and standard quantities during the fiscal year

P 12–6: Changing Standards

The empirical evidence reveals that very few firms change their standard prices and standard quantities during the fiscal year. Most firms have the following policy, “We set our standards before the fiscal year begins and we NEVER, NEVER change them during the year (except when we have to).”

Required:
a. Evaluate the “never change” policy. Does it make any sense? Why would firms adopt such a policy?
b. When would you expect firms to change their standards during the fiscal year?

Click here for the solution: The empirical evidence reveals that very few firms change their standard prices and standard quantities during the fiscal year