Analysis of operating leverage Rachel Geer has invested in two start-up companies. At the end of the first year, she asks you to evaluate their operating performance. The following operating data apply to the first year: 

.:.

Required

a. Use the contribution margin approach to compute the operating leverage for each firm.

b. If the economy expands in the coming year, Ander and Sander will both enjoy a 10 percent per year increase in sales volume, assuming that the selling price remains unchanged. (Note: Since the number of units increases, both revenue and variable cost will increase.) Compute the change in net income for each firm in dollar amount and in percentage.

c. If the economy contracts in the following year, Ander and Sander will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. (Note: Since the number of units decreases, both revenue and variable cost decrease.) Compute the change in net income for each firm in both dollar amount and percentage.

d. Write a memo to Rachel Geer with your evaluation and recommendations. 

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Company Name Ander Sander Variable cost per unit (a) Sales revenue (25,000 units x $16) Variable cost (25,000 units x a) $12 $400,000 (300,000) $6 $400,000 (150,000) Contribution margin Fixed cost 100,000 (50,000) $ 50,000 250,000 (200,000) $ 50,000 Net income