4.5 A financial analyst is investment alternatives, Investment A and Investment B. Investment A is a labor-intensive firm while Investment B uses a mechanized system. Variable costing income statements for the two companies are shown below: Investment A P1,000,000 600,000 Investment B P1,000,000 250,000 750,000 550,000 P200,000 Sales Variable costs Contribution margin 400,000 Fixed costs 200,000 P 200.000 Net income The analyst is interested in acquiring one of these companies. However, he 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. b. Determine the affect on each company's net income if sales decrease by 10% and if sales increase by 20%. Do not prepare income statements.
4.5 A financial analyst is investment alternatives, Investment A and Investment B. Investment A is a labor-intensive firm while Investment B uses a mechanized system. Variable costing income statements for the two companies are shown below: Investment A P1,000,000 600,000 Investment B P1,000,000 250,000 750,000 550,000 P200,000 Sales Variable costs Contribution margin 400,000 Fixed costs 200,000 P 200.000 Net income The analyst is interested in acquiring one of these companies. However, he 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. b. Determine the affect on each company's net income if sales decrease by 10% and if sales increase by 20%. Do not prepare income statements.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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