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2.

Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year's operations of the two firms he is considering and give him some business advice Company Name Larsorn Benson $ 18.00 $ 9.00 $ 262,400 $262,400 Variable cost per unit (a) Sales revenue (8,200 units x $32.00) variable cost (8,200 units a) Contribution margin Fixed cost Net income (147,600) 73,800) $ 114,800 188,600 98,500 $ 90,100 90,100 24,700 Required a. Use the contribution margin approach to compute the operating leverage for each firm b. If the economy expands in coming years, Larson and Benson will both enjoy a 10 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage (Note: Since the number of units increases, both revenue and variable cost will increase.) c. If the economy contracts in coming years, Larson and Benson will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage (Note: Since the number of units increases, both revenue and variable cost will increase.)