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Question(s) / Instruction(s):

 An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old-Fashion Apples uses a labor-intensive approach, and Mech-Apple uses a mechanized system. CVP income statements for the two companies are shown below.

                                                                Old Fashion Apples                        Mech-Apple

                Sales                                      $397,700                                             $397,700             

                Variable costs                    333,953                                147,305

                Contribution margin       63,747                                                  250,395

                Fixed costs                          6,317                                                    192,965

                Net income                        $57,430                                $57,430

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.

Required:

1              Calculate each company's degree of operating leverage.

2              Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 4.8%. Do not prepare income statements

 

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