Exercise 20-16 (Part Level Submission) Traditional Yams Auto-Yams (a1) Degree of
ID: 2541972 • Letter: E
Question
Exercise 20-16 (Part Level Submission)
Traditional
Yams
Auto-Yams
(a1)
Degree of Operating Leverage
Exercise 20-16 (Part Level Submission)
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 $ 391,000 $ 391,000 Variable costs 322,000 164,000 Contribution margin 69,000 227,000 Fixed costs 33,000 191,000 Net income $ 36,000 $ 36,000The 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.
(a1)
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-YamsExplanation / Answer
Degree of operating leverage = Contribution margin/Operating income
Traditional Yams = 69000/36000 = 1.92
Auto Yams = 227000/36000 = 6.31
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