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 year's operations of the two firms he is considering and give him some business advice. Variable cost per unit (a) Sales revenue (8,600 units * $31.00) Variable cost (8,600 units x a) Contribution margin Fixed cost Net income Company Name Larson Benson $ 21.00 $ 10.50 $ 266,600 $ 266,600 (180,600) (90,300) $ 86,000 $ 176,300 (24,600). (114,900) $ 61,400 $ 61,400 Required a. Use the contribution margin approach to compute the operating leverage for each firm. b. If the economy expands in coming years, Larson and Benson will both enjoy a 11 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.) c. If the economy contracts in coming years, Larson and Benson will both suffer a 11 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.) Complete this question by entering your answers in the tabs below. Required A Required B Required C Use the contribution margin approach to compute the operating leverage for each firm. (Round your answers to 2 decimal places.) Company Name Larson Operating leverage 1.40 Benson 2.87 Complete this question by entering your answers in the tabs below. Required A Required B Required C If the economy expands in coming years, Larson and Benson will both enjoy a 11 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 $ 21.00 $ 10.50 Variable cost per unit Sales revenue Variable cost Complete this question by entering your answers in the tabs below. Required A Required B Required If the economy contracts in coming years, Larson and Benson will both suffer a 11 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 $ 21.00 $ 10.50 Variable cost per unit Sales revenue Variable cost
