Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million 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. Company Name Larson BensonVariable cost per unit (a)$19.00 $9.50 Sales revenue (8,100 units × $28.00)$226,800 $226,800 Variable cost (8,100 units × a) (153,900) (76,950)Contribution margin$72,900 $149,850 Fixed cost (24,300) (101,250)Net income$48,600 $48,600 RequiredUse the contribution margin approach to compute the operating leverage for each firm.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.)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.) ### Financial Analysis of Larson and Benson Companies**Instructions:**Complete this question by entering your answers in the tabs below.**Problem Statement:**If the economy expands in coming years, Larson and Benson will both enjoy an 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. Round "Percentage" answer to 2 decimal places (i.e., 23.45 should be entered as 23.45). Round final answers to nearest whole dollar.)### Data Table:| Company Name | | | ||----------------|----|----|----|| | Larson | Benson || Variable cost per unit | $19.00 | $9.50 || Sales revenue | | || Variable cost | | || Contribution margin | | || Fixed cost | | || Net income | | || Percentage change | % | % |### Steps to Calculate Net Income Change:1. **Determine the Increase in Sales Revenue:** - Calculate the 11% increase in sales for both Larson and Benson. 2. **Compute the Variable Costs:** - As sales increase, variable costs per unit will also increase. 3. **Calculate the Contribution Margin:** - Contribution Margin = Sales Revenue - Variable Cost4. **Assess Fixed Costs:** - Fixed costs remain unchanged with an increase in sales.5. **Determine Net Income:** - Net Income = Contribution Margin - Fixed Cost6. **Calculate the Percentage Change in Net Income:** - Percentage Change = [(New Net Income - Original Net Income) / Original Net Income] * 100 You are required to fill in values for each cell based on the above instructions. Ensure that all percentage values are rounded to two decimal places and final values are rounded to the nearest whole dollar, as specified.**Note:**The table is to be filled based on the provided and calculated financial data. Click on the respective required tabs (A, B, C) to submit your answers for the given sections. ### Compute Operating Leverage Using Contribution Margin Approach#### Instructions:Complete this question by entering your answers in the tabs below.**Important Note:**- Round your answers to 2 decimal places.#### Tabs to Complete:- Required A- Required B- Required C#### Question:Use the contribution margin approach to compute the operating leverage for each firm.#### Table for Input:| Company Name | Operating Leverage ||--------------|--------------------|| Larson | || Benson | |#### Navigation:- To enter data for "Required B", click the "Required B" tab.- Make sure to go through "Required A" and "Required C" for complete information.This exercise helps understand the application of the contribution margin approach in calculating operating leverage, an important measure to assess the risk associated with fixed versus variable costs in business operations.

(1) Operating Leverage of Companies (A) Larson Operating Leverage = Contribution÷ EBIT = 72900÷48600…

Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million 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. Company Name Larson Benson Variable cost per unit (a) $ 19.00 $ 9.50 Sales revenue (8,100 units × $28.00) $ 226,800 $ 226,800 Variable cost (8,100 units × a) (153,900 ) (76,950 ) Contribution margin $ 72,900 $ 149,850 Fixed cost (24,300 ) (101,250 ) Net income $ 48,600 $ 48,600 Required Use the contribution margin approach to compute the operating leverage for each firm. 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.) 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.)

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q