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An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Crane Yams uses a labor- intensive approach, and
An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Crane Yams uses a labor- intensive approach, and Cullumber Yams uses a mechanized system. CVP income statements for the two companies are shown below. Crane Yams Cullumber Yams Sales $ 398,000 $ 398,000 Variable costs 319,000 157,000 Contribution margin 79,000 241,000 Fixed costs 29,000 191,000 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. Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.) Degree of Operating Leverage Crane Yams 1.58 Cullumber Yams 4.82 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).) % Change in Net Income Sales decrease by 15% Crane Yams % Cullumber Yams % Sales increase by 10% Crane Yams % Cullumber Yams %
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