Determine the effect on each company\'s net income if sales decrease by 10% and

Question

Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 5%. Do not prepare income statements. 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. 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. Determine which company's cost structure makes it more sensitive to changes in sales volume.

Explanation / Answer

a)10%increase in sales sales=399200*(1+0.1)=439120 VC=320000*1.1=352000 contribution margin=87120 fixed cost=22400 netincome=109520 increase by 38% similarly mech app -42.46%increase b)decrease in sales by 5% oldfashion-decrease by 6.97% mech app-26.02% decrease c)old fashion-3.8 mech app-4.25 so mech app is more psensitive to change

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