Calculate each companys degree of operating leverage

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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).)

Reference no: EM131802087

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