A company is looking into two alternative methods of producing its product. The following information about the two alternatives is available. If the company's expected sales volume is 35,000 units, which alternative should be selected?Prepare forecasted contribution margin income statements and compute the degree of operating leverage to assess the alternatives.?Alternative #1Alternative #2Variable costs per unit………$8$12Fixed costs……………………$240,000$140,000Selling price per unit…………$20$20
What will be an ideal response?
| Alternative 1 | ? | Alternative 2 |
| Sales (35,000 ? $20)……… | $700,000 | Sales (35,000 ? $20)……… | $700,000 |
| Variable costs | Variable costs |
| (35,000 ? $8)……………… | (280,000) | (35,000 ? $12)…………… | (420,000) |
| Contribution margin……… | $420,000 | Contribution margin……… | $280,000 |
| Fixed costs……………… | (240,000) | Fixed costs………………… | (140,000) |
| Income…………………… | $180,000 | Income…………………… | $140,000 |
| Degree of operating leverage: | Degree of operating leverage: |
| $420,000/$180,000 = 2.3 | $280,000/$140,000 = 2 |
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