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An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Sunland Yams uses a labor-intensive approach, and Carla
An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Sunland Yams uses a labor-intensive approach, and Carla Vista Yams uses a mechanized system. CVP income statements for the two companies are shown below. Sunland Yams Carla Vista Yams Sales $396,000 $396,000 Variable costs 319,000 156,000 Contribution margin 77,000 240,000 Fixed costs 27,000 190,000 Net income $50,000 $50,000 The 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. Your answer is correct. Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.) Degree of Operating Leverage Sunland Yams Carla Vista Yams 1.54 4.80 Determine the effect on each company's net income if sales decrease by 15% and if sales increase by 10%. Assume that sales fluctuations are attributable to changes in units sold. Do not prepare income statements. (Round answers to 2 decimal places, e.g. 10.52. If % change is negative, enter amount with either a negative sign or parenthesis, e.g. -10.52 or (10.52).) Sales decrease by 15% Sunland Yams % Change in Net Income 15.32 % do Carla Vista Yams 14.03 % Sales increase by 10% Sunland Yams 15.40 do % Carla Vista Yams 48.00 %
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