An investment banker is analyzing two companies that specialize in the production and sales of gourmet cappuccino and chai mixes. Roasted Beans Co. uses a labor- intensive approach and Monat Industries uses a mechanized system. Variable costing income statements for the two companies are shown below:

	Roasted Beans	Monat Industries
Sales	1,000,000	1,000,000
Variable Costs	650,000	300,000
Contribution Margin	350,000	700,000
Fixed Costs	175,000	525,000
Net Income	175,000	175,000

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.

Degree of Operating Leverage

Roasted Beans

Monat Industries

Determine the effect on each company's net income. Do not prepare income statements.

IF sales decrease by 10%

Change in Net Income

Roasted Beans

Increase or Decrease?

Monat

Increase or decrease?

IF sales increase by 15%

Change in Net Income

Roasted Beans

Increase or decrease?

Monat

Increase or decrease?