Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million 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 years operations of the two firms he is considering and give him some business advice.

Required

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

2. If the economy expands in coming years, Larson and Benson will both enjoy a 12 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.)

3. If the economy contracts in coming years, Larson and Benson will both suffer a 12 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 increases, both revenue and variable cost will increase.)

Company Name Larson Benson Variable cost per unit (a) Sales revenue (8,400 units x $30.00) Variable cost (8,400 units x a) Contribution margin Fixed cost Net income $21.0010.50 $ 252,000 252,000 $ 75,600 163,800 $ 51,400 51,400 (176, 400) (88,200) (24,200) (112,400) Required A Required BRequired C If the economy expands in coming years, Larson and Benson will both enjoy a 12 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.) (Negative values should be indicated with a minus sign. Round "Percentage change" to 2 decimal places.) Show less Company Name Larson Benson Variable cost per unit21.0010.50 Sales revenue Variable cost Contribution margin Fixed cost Net income Percentage change Required A Required B Required C If the economy contracts in coming years, Larson and Benson will both suffer a 12 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.) (Negative values should be indicated with a minus sign. Round "Percentage change" to 2 decimal places) Show less Company Name Larson Benson Variable cost per unit 21.00 Sales revenue Variable cost Contribution margin Fixed cost Net income Percentage change 10.50