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E-Z Seats manufactures swivel seats for customized vans. It currently manufactures

10,000 seats per year, which it sells for $500 per seat. It incurs variable costs of $200 per seat and

fi xed costs of $2,000,000. It is considering automating the upholstery process, which is now largely

manual. It estimates that if it does so, its fi xed costs will be $3,000,000, and its variable costs will

decline to $100 per seat.

Instructions

(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.

A

Sales

Variable costs

Contribution margin

Fixed costs

Net income

B

Contribution margin ratio =

Break-even point in dollars =

Margin of safety ratio =

Degree of operating leverage =

C

Sales

Variable costs

Contribution margin

Fixed costs

Net income

D

Contribution margin ratio

Break-even point in dollars =

Margin of safety ratio =

Degree of operating leverage =

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