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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. Variable cost per unit (a) Sales revenue (8,400 units x $31.00) Variable cost (8,400 units x a) Contribution margin Fixed cost Net income Company Name Benson $ 10.00 $ 260,400 (84,000) $ 176,400 (24,400) (108,400) $ 68,000 $ 68,000 Larson $ 20.00 $ 260,400 (168,000) $ 92,400 Required a. Use the contribution margin approach to compute the operating leverage for each firm. b. If the economy expands in coming years, Larson and Benson will both enjoy a 10 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.) c. If the economy contracts in coming years, Larson and Benson will both suffer a 10 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 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. Variable cost per unit (a) Sales revenue (8,400 units x $31.00) Variable cost (8,400 units x a) Contribution margin Fixed cost Net income Company Name Benson $ 10.00 $ 260,400 (84,000) $ 176,400 (24,400) (108,400) $ 68,000 $ 68,000 Larson $ 20.00 $ 260,400 (168,000) $ 92,400 Required a. Use the contribution margin approach to compute the operating leverage for each firm. b. If the economy expands in coming years, Larson and Benson will both enjoy a 10 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.) c. If the economy contracts in coming years, Larson and Benson will both suffer a 10 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 ACCOUNTING
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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**Business Analysis for Investment Decisions** Arnold Vimka faces two potential investment opportunities and plans to invest $1 million in a start-up. Given his concerns about economic volatility, we analyze past financial data from operations of two firms to provide strategic advice. ### Financial Data Overview **Company Data** | Company Name | Larson | Benson | |-----------------|--------------|--------------| | Variable cost per unit ($) | 20.00 | 10.00 | | Sales revenue (8,400 units x $31.00) | $260,400 | $260,400 | | Variable cost (8,400 units x $) | $168,000 | $84,000 | | Contribution margin | $92,400 | $176,400 | | Fixed cost | $24,400 | $108,400 | | Net income | $68,000 | $68,000 | ### Required Analysis 1. **Operating Leverage Calculation** Use the contribution margin approach to compute the operating leverage for each firm. 2. **Impact of Sales Increase** Assume a 10% increase in sales for both companies. Analyze the change in net income for each: - Compute the change in net income in dollars and percentage. 3. **Impact of Sales Decrease** Assume a 10% decrease in sales for both companies. Analyze the change in net income for each: - Compute the change in net income in dollars and percentage. **Note:** - Selling price remains constant. - For sales increase: Total revenue and variable cost increase. - For sales decrease: Total revenue and total variable cost decrease. ### Instructions - Complete the analysis using the provided tables. - Round operating leverage answers to two decimal places. ### Submission Input your findings in the provided tabs and proceed to the next required section. --- This educational content guides learners through an analysis evaluating investment prospects based on a firm's financial data stability and profitability under varying economic conditions.
Transcribed Image Text:**Business Analysis for Investment Decisions** Arnold Vimka faces two potential investment opportunities and plans to invest $1 million in a start-up. Given his concerns about economic volatility, we analyze past financial data from operations of two firms to provide strategic advice. ### Financial Data Overview **Company Data** | Company Name | Larson | Benson | |-----------------|--------------|--------------| | Variable cost per unit ($) | 20.00 | 10.00 | | Sales revenue (8,400 units x $31.00) | $260,400 | $260,400 | | Variable cost (8,400 units x $) | $168,000 | $84,000 | | Contribution margin | $92,400 | $176,400 | | Fixed cost | $24,400 | $108,400 | | Net income | $68,000 | $68,000 | ### Required Analysis 1. **Operating Leverage Calculation** Use the contribution margin approach to compute the operating leverage for each firm. 2. **Impact of Sales Increase** Assume a 10% increase in sales for both companies. Analyze the change in net income for each: - Compute the change in net income in dollars and percentage. 3. **Impact of Sales Decrease** Assume a 10% decrease in sales for both companies. Analyze the change in net income for each: - Compute the change in net income in dollars and percentage. **Note:** - Selling price remains constant. - For sales increase: Total revenue and variable cost increase. - For sales decrease: Total revenue and total variable cost decrease. ### Instructions - Complete the analysis using the provided tables. - Round operating leverage answers to two decimal places. ### Submission Input your findings in the provided tabs and proceed to the next required section. --- This educational content guides learners through an analysis evaluating investment prospects based on a firm's financial data stability and profitability under varying economic conditions.
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