Reference no: EM13588036

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		$399,500		$399,500
Variable costs		315,600		158,100
Contribution margin		83,900		241,400
Fixed costs		19,300		176,800
Net income		$64,600		$64,600

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.

(a) Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.)

		Degree of Operating Leverage
Traditional Yams
Auto-Yams

(b) Prepare a CVP income statement for each company, assuming that sales revenue decreases by 30%.

(c) Determine the effect on each company's net income if sales decrease by 11% and if sales increase by 5%. (Round answers to 2 decimal place, e.g. 10.52%. If % change is negative, enter amount with either a negative sign or parenthesis, e.g. -10.52 or (10.52).)

		% Change in Net Income
Sales decrease by 11%
Traditional Yams			%
Auto-Yams			%
Sales increase by 5%
Traditional Yams			%
Auto-Yams			%