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
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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.
Transcribed Image Text: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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