3 An investment banker is analyzing two companies that specialize in the duction and sale of candied apples. Old-Fashion Apples uses a labor-intensive approach and Mech-Apple uses a mechanized system. Variable costing income statements for two companies are shown below. Sales Variable costs Contribution margin Fixed costs Net income Old-Fashion Apples Mech-Apple $400,000 $400,000 320,000 160,000 80,000 240,000 20,000 180,000 $ 60,000 $ 60,000 The investment banker is interested in acquiring one of these companies. However he is concerned about the impact that each company's cost structure might have on its prof- itability. Instructions a.) Calculate each company's degree of operating leverage. Determine which company structure makes it more sensitive to changes in sales volume. b.) Determine the effect on each company's net income if sales decrease by 10% and Sales increase by 5%. Do not prepare income statements. Which company should the investment banker acquire? Discuss. 3 An investment banker is analyzing two companies that specialize in the duction and sale of candied apples. Old-Fashion Apples uses a labor-intensive approach and Mech-Apple uses a mechanized system. Variable costing income statements for two companies are shown below. Sales Variable costs Contribution margin Fixed costs Net income Old-Fashion Apples Mech-Apple $400,000 $400,000 320,000 160,000 80,000 240,000 20,000 180,000 $ 60,000 $ 60,000 The investment banker is interested in acquiring one of these companies. However he is concerned about the impact that each company's cost structure might have on its prof- itability. Instructions a.) Calculate each company's degree of operating leverage. Determine which company structure makes it more sensitive to changes in sales volume. b.) Determine the effect on each company's net income if sales decrease by 10% and Sales increase by 5%. Do not prepare income statements. Which company should the investment banker acquire? Discuss.