Once upon a time, there were two brothers (Barry and Larry) who dreamed about owning and operating companies in the same line of business. Barry believed in maintaining a very large, highly productive manual labor force. Larry, on the other hand, favored using a much smaller labor force and highly automated production processes instead. One brother's business was located in Madison, while the other brother's business was located in Austin. Here is information about each of the two businesses:

Results for the current year Madison Austin

Sales $ 2,000,000 $2,000,000

Contribution Margin 1,700,000 400,000

Net Income 150,000 150,000

Required:

A. Of these two businesses, Madison or Austin, (1) which one has the higher level of variable cost and (2) which one has the higher level of fixed cost? Explain how you determined your answers.

B. Which brother probably owns the business in Madison? Which one probably owns the business in Austin? Explain how you determined your answers.

C. Compute the Breakeven Point in sales dollars for each of the two businesses.

D. Compute for each of the two businesses the total amount of sales (in dollars) that would be required to earn a net income of $100,000.

E. What is the current margin of safety for each of these two businesses.

F. Compute the degree of operating leverage for each of the two businesses.

G. Suppose that each of these two businesses had an opportunity to increase its current sales by 10%. Which business would experience a larger percentage change in net income as a result in that 10% increase in sales? Explain why and show computations to back up your answer.