Exercise 6-16 a1, b (Video)

An investment banker is analyzing two companies that specialize in the production 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.

		Traditional Yams		Auto-Yams
Sales		$398,000		$398,000
Variable costs		319,000		157,000
Contribution margin		79,000		241,000
Fixed costs		29,000		191,000
Net income		$50,000		$50,000

The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each companys cost structure might have on its profitability.

	Your answer is correct.

Calculate each companys degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.)

		Degree of Operating Leverage
Traditional Yams
Auto-Yams

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Determine the effect on each companys net income if sales decrease by 20% and if sales increase by 6%. Do not prepare income statements. (Round answers to 2 decimal places, e.g. 10.52. If % change is negative, enter amount with either a negative sign or parenthesis, e.g. -10.52 or (10.52).)

		% Change in Net Income
Sales decrease by 20%
Traditional Yams			%
Auto-Yams			%
Sales increase by 6%
Traditional Yams			%
Auto-Yams			%

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