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Blue Spruce Cafeteria operates cafeteria food services in public buildings in the Midwest. Blue Spruce is contemplating a major change in its cost structure. Currently, all of their cafeteria lines are staffed with hourly wage employees who hand serve the food to customers. Benson Riggs, Blue Spruces owner, is considering replacing the employees with an automated self-service system. However, before making the change, Benson would like to know the consequences of the change, since the volume of business varies significantly from location to location. Shown below are the CVP income statements for each alternative.

		Personal Service System			Automated Self-Service System
Sales		$2,160,000				$2,160,000
Variable costs		1,728,000				1,188,000
Contribution margin		$432,000				$972,000
Fixed costs		108,000				648,000
Net Income		$324,000				$324,000

(a)

Determine the degree of operating leverage for each alternative. (Round answers to 2 decimal places, e.g. 15.25.)

		Personal Service System		Automated Self-Service System
Operating leverage		enter a value rounded to 2 decimal places		enter a value rounded to 2 decimal places

Attempts: unlimited

(b)

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Your answer is correct.

Which alternative would produce the higher net income if sales increased by $216,000?

The automated self-service system would produce the higher net income.

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(c)

Using the margin of safety ratio, determine which alternative could sustain the greater decline in sales before operating at a loss. (Round answers to 2 decimal places, e.g. 0.25.)

		Personal Service System		Automated Self-Service System
Margin of safety ratio		.75		.33

Personal service system could sustain the greater decline in sales before operating at a loss.

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(d)

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Your answer is partially correct.

Blue Spruces vice president of finance has offered another option. He suggests a different system that combines personal service at key points in the cafeteria line with a less expensive automated self -service system for the other items. The financial information on this system is given below:

		Blended Service System
Sales		$2,160,000
Variable costs		1,188,000
Contribution margin		$972,000
Fixed costs		648,000
Net Income		$324,000

(1) Determine the degree of operating leverage for this option. (Round answer to 2 decimal places, e.g. 15.25.)

Operating leverage

enter the degree of operating leverage rouded to 2 decimal places

(2) How much would net income increase if sales increased by $216,000? (Round answer to 2 decimal places, e.g. 15.25%.)

Net income

enter the net income in percentages rouded to 2 decimal places %

(3) Using the margin of safety ratio, how large of a decline in sales could this option sustain before operating at a loss. (Round margin of safety ratio to 2 decimal places, e.g. 0.25 and decline in sales to 0 decimal places, e.g. 125.)

Margin of safety ratio		enter ratio rounded to 2 decimal places
Decline in sales		enter percentages rounded to 0 decimal places %

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