Question

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 Variable costs Contribution margin Fixed costs Net income $402,000 324,000 78,000 28,000 $50,000 $402,000 160,000 242,000 192,000 $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 an its profitability. Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 1.15.) Degree of Operating Leverage Traditional Yams Auto-Yams LINK TO TEXT VIDEO: SIMILAR EXERCISE Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 7%. 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 10% Traditional Yams Auto-Yams Sales increase by 7% Traditional Yams Auto-Yams

Answer 1

1
	Degree of Operating Leverage
Traditional Yarns	1.56	=78000/50000
Auto-Yarns	4.84	=242000/50000
2
	% Change in Net income
Sales decrease by 10%
Traditional Yarns	-15.60%	=10%*1.56
Auto-Yarns	-48.40%	=10%*4.84
Sales increase by 7%
Traditional Yarns	10.92%	=7%*1.56
Auto-Yarns	33.88%	=7%*4.84