4.5A financial analyst is investment alternatives, Investment A and Investment B.Investment A is a labor-intensive firm while Investment B uses a mechanized system. Variablecosting income statements for the two companies are shown below:Investment BP1,000,000250,000750,000550,000P200.000Investment AP1,000,000600,000Contribution margin 400,000200,000P 200.000SalesVariable costsFixed costsNet incomeThe analyst is interested in acquiring one of these companies. However, he is concernedabout 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 salesincrease by 20%. Do not prepare income statements.

The degree of operating leverage is a measure of the reason behind the change in net income due to…

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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Pricing

Pricing is used as a term in finance and economics, pricing is the process of fixing a value for a product or a service. Pricing establishes a value for a product or service that the customer has to pay. A business can choose from different strategies while deciding to set prices.

Question

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 B
P1,000,000
250,000
750,000
550,000
P200.000
Investment A
P1,000,000
600,000
Contribution margin 400,000
200,000
P 200.000
Sales
Variable costs
Fixed costs
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.

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