34563 1 Question 4: Degree of Operating Leverage (8 marks) 2 An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. The first company, Fireside uses a labour-intensive approach, while Stirring Moments uses a mechanized system. CVP income statements for the two companies are shown below: Sales 7 Variable Costs 8 Contribution Margin 9 Fixed Costs 10 Operating Income 11 $ FireSide 1,000,000 $ Stirring Moments 1,000,000 200,000 400,000 800,000 600,000 600,000 400,000 200,000 200,000 12 Calculate the following for each company: (4 marks) 13 CM Ratio 14 Breakeven Point in Sales Dollars 15 Margin of Safety Ratio 16 Calculate the degree of operating leverage for each company 17 As the investment banker, which company would you want to invest in at the current sales level? Which 18 provides the lesser risk? Use your answers above to support your answer. (2 marks) 06 If sales are expected to increase next year by 10%, which company will be more profitable? Why is this the case? Your response must be clear enough for a non-accountant to understand and must use question data. Use your answer for degree of operating leverage to support your answer. Otherwise, no marks awarded. (2 marks)