Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $$800,000$ in a start$-$up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year$$s operations of the two firms he is considering and give him some business advice.

Company Name

Larson Benson

Variable cost per unit $($a$)$ $ $16\mathrm{.}00$ $ $7\mathrm{.}00$

Sales revenue $(8,000$ units $\backslash$times $$25)$ $ $200,000$ $ $200,000$

Variable cost $(8,000$ units $\backslash$times a$)(128,000)(56,000)$

Contribution margin $ $72,000$ $ $144,000$

Fixed cost $(24,000)(96,000)$

Net income $ $48,000$ $ $48,000$

Required

Use the contribution margin approach to compute the operating leverage for each firm.

If the economy expands in coming years, Larson and Benson will both enjoy a $10$ percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. $($Note: Since the number of units increases, both revenue and variable cost will increase.$)$

If the economy contracts in coming years, Larson and Benson will both suffer a $10$ percent $$decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. $($Note: Since the $$number of units decreases, both total revenue and total variable cost will decrease.$)$