Exercise- An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto-Yams uses a mechanized system. CVP income statements for the two companies are shown below.
Traditional
Yams |
Auto-Yams |
| Sales |
$ 404,000 |
$ 404,000 |
| Variable costs |
330,000 |
156,000 |
| Contribution margin |
74,000 |
248,000 |
| Fixed costs |
27,000 |
201,000 |
| Net income |
$ 47,000 |
$ 47,000 |
The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability.
Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.)
Determine the effect on each company's net income if sales decrease by 15 % and if sales increase by 8 %. Do not prepare income statements. (Round answers to 2 decimal places, e.g. 10.52. If % change is negative, enter amount with either a negative sign or parenthesis, e.g. -10.52 or (10.52).)