Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year's operations of the two firms he is considering and give him some business advice. Variable cost per unit (a) Sales revenue (8,100 units x $28.00) Variable cost (8,100 units x a) Contribution margin Fixed cost Net income Company Name Larson $ $ $ $ 18.00 226,800 Benson (145,800 ) 81,000 (24,400 ) 56,600 $9.00 $ 226,800 (72,900 ) $ 153,900 (97,300 ) $ 56,600 Required 1. Use the contribution margin approach to compute the operating leverage for each firm. 2. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.) 3. If the economy contracts in coming years, Larson and Benson will both suffer a 11 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units decreases, both total revenue and total variable cost will decrease.)
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year's operations of the two firms he is considering and give him some business advice. Variable cost per unit (a) Sales revenue (8,100 units x $28.00) Variable cost (8,100 units x a) Contribution margin Fixed cost Net income Company Name Larson $ $ $ $ 18.00 226,800 Benson (145,800 ) 81,000 (24,400 ) 56,600 $9.00 $ 226,800 (72,900 ) $ 153,900 (97,300 ) $ 56,600 Required 1. Use the contribution margin approach to compute the operating leverage for each firm. 2. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.) 3. If the economy contracts in coming years, Larson and Benson will both suffer a 11 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar amount and in percentage. (Note: Since the number of units decreases, both total revenue and total variable cost will decrease.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1,000,000 in a
start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data
for the past year's operations of the two firms he is considering and give him some business advice.
Variable cost per
unit (a)
Sales revenue
(8,100 units x
$28.00)
Variable cost
(8,100 units x a)
Contribution.
margin
Fixed cost
Net income
Company
Name
Larson
$
$
$
$
18.00
226,800
Benson
(145,800 )
81,000
(24,400 )
56,600
$9.00
$ 226,800
(72,900 )
$ 153,900
(97,300 )
$ 56,600
Required
1. Use the contribution margin approach to compute the operating leverage for each firm.
2. If the economy expands in coming years, Larson and Benson will both enjoy a 11 percent per year increase in sales,
assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar
amount and in percentage. (Note: Since the number of units increases, both revenue and variable cost will increase.)
3. If the economy contracts in coming years, Larson and Benson will both suffer a 11 percent decrease in sales volume,
assuming that the selling price remains unchanged. Compute the change in net income for each firm in dollar
amount and in percentage. (Note: Since the number of units decreases, both total revenue and total variable cost
will decrease.)
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