For nearly 20 years, Specialized Coatings has provided painting and galvanizing services for manufacturers in its
region. Manufacturers of various metal products have relied on the quality and quick turnaround time provided
by Specialized Coatings and its 20 skilled employees. During the last year, as a result of a sharp upturn in the
economy, the company's sales have increased by 30% relative to the previous year. The company has not been
able to increase its capacity fast enough, so Specialized Coatings has had to turn work away because it cannot
keep up with customer requests.
Top management is considering the purchase of a sophisticated robotic painting booth. The booth would
represent a considerable move in the direction of automation versus manual labor. If Specialized Coatings
purchases the booth, it would most likely lay off 15 of its skilled painters. To analyze the decision, the company
compiled production information from the most recent year and then prepared a parallel compilation assuming
that the company would purchase the new equipment and lay off the workers. The data is attache. As you can
see, the company projects that during the last year it would have been far more profitable if it had used the
automated approach.
Instructions (be sure to show your calculations)
a. Compute and interpret the contribution margin ratio under each approach.
b. Compute the break-even point in sales dollars under each approach. Discuss the implications of your
findings.
c. Using the current level of sales, compute the margin of safety ratio under each approach and interpret your
findings.
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Discuss what other issues the company must consider in making this decision.
