E20-16 An investment banker is analyzing two companies that specialize in the produc- tion and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto- Yams uses a mechanized system. CVP income statements for the two companies are shown below. Auto-Yams Sales Variable costs Contribution margin Fixed costs Net income Traditional Yams $400,000 320,000 80,000 30,000 $ 50,000 $400,000 160,000 240,000 190,000 $ 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. Instructions (a) Calculate each company's degree of operating leverage. Determine which company's cost structure makes it more sensitive to changes in sales volume. (b) Determine the effect on each company's net income if sales decrease by 15% and if sales increase by 10%. Do not prepare income statements. (c) Which company should the investment banker acquire? Discuss. Degree of Contribution DIV Net Income Operating Margin Leverage Traditional Yams Auto-Yams Which company's cost structure makes it more sensitive to changes in sales volumes % Change in Sales Times Degree of Operating Leverage % Change in Net Income 15% Decrease: Traditional Yams Auto-Yams X (15%) (15%) 10% Increase: Traditional Yams Auto-Yams 10% 10% Which company should the investment banker acquire ... and WHY? (one word or ono sentence "answers" tell me you blew this off ... THINK, ANALYZE, RESPOND like a manager or investor.)