1 answer

Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1...

Question:

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) Sales revenue (8,400 units x $30.00) Variable cost (8,400 units x a) Contribution margin Fixed cost Net income $21.0010.50 $ 252,000 252,000 $ 75,600 163,800 $ 51,400 51,400 (176, 400) (88,200) (24,200) (112,400)

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 12 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 12 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 increases, both revenue and variable cost will increase.)

Required A Required BRequired C If the economy expands in coming years, Larson and Benson will both enjoy a 12 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.) (Negative values should be indicated with a minus sign. Round Percentage change to 2 decimal places.) Show less Company Name Larson Benson Variable cost per unit21.0010.50 Sales revenue Variable cost Contribution margin Fixed cost Net income Percentage changeRequired A Required B Required C If the economy contracts in coming years, Larson and Benson will both suffer a 12 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.) (Negative values should be indicated with a minus sign. Round Percentage change to 2 decimal places) Show less Company Name Larson Benson Variable cost per unit 21.00 Sales revenue Variable cost Contribution margin Fixed cost Net income Percentage change 10.50

Company Name Larson Benson Variable cost per unit (a) Sales revenue (8,400 units x $30.00) Variable cost (8,400 units x a) Contribution margin Fixed cost Net income $21.0010.50 $ 252,000 252,000 $ 75,600 163,800 $ 51,400 51,400 (176, 400) (88,200) (24,200) (112,400)
Required A Required BRequired C If the economy expands in coming years, Larson and Benson will both enjoy a 12 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.) (Negative values should be indicated with a minus sign. Round "Percentage change" to 2 decimal places.) Show less Company Name Larson Benson Variable cost per unit21.0010.50 Sales revenue Variable cost Contribution margin Fixed cost Net income Percentage change
Required A Required B Required C If the economy contracts in coming years, Larson and Benson will both suffer a 12 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.) (Negative values should be indicated with a minus sign. Round "Percentage change" to 2 decimal places) Show less Company Name Larson Benson Variable cost per unit 21.00 Sales revenue Variable cost Contribution margin Fixed cost Net income Percentage change 10.50

Answers

Answer A)
Larson Company:
Operating Leverage = Contribution Margin / Net Income
Operating Leverage = $75,600 / $51,400
Operating Leverage = 1.47
Benson Company:
Operating Leverage = Contribution Margin / Net Income
Operating Leverage = $163,800 / $51,400
Operating Leverage = 3.19
Answer B)
Company Name
Larson Benson
Variable cost per unit $21.00 $10.50
Sales revenue      2,82,240    2,82,240
Variable cost    -1,97,568      -98,784
Contribution margin         84,672    1,83,456
Fixed cost       -24,200 -1,12,400
Net income         60,472       71,056
Percentage change 17.65% 38.24%
Larson Company:
Sales = $252,000 * 1.12
Sales = $282,240
Variable Cost = $176,400 * 1.12
Variable Cost = $197,568
Percentage Change in sales = ($60,472 - $51,400) / $51,400
Percentage Change in sales = 17.65%
Benson Company:
Sales = $252,000 * 1.12
Sales = $282,240
Variable Cost = $88,200 * 1.12
Variable Cost = $98,784
Percentage Change in sales = ($71,056 - $51,400) / $51,400
Percentage Change in sales = 38.24%
Answer c)
                                                                           Company Name
Larson Benson
Variable cost per unit $21.00 $10.50
Sales revenue      2,21,760    2,21,760
Variable cost    -1,55,232      -77,616
Contribution margin         66,528    1,44,144
Fixed cost       -24,200 -1,12,400
Net income         42,328       31,744
Percentage change -17.65% -38.24%
Larson Company:
Sales = $252,000 * 0.88
Sales = $221,760
Variable Cost = $176,400 * 0.88
Variable Cost = $155,232
Percentage Change in sales = ($42,328 - $51,400) / $51,400
Percentage Change in sales = -17.65%
Benson Company:
Sales = $252,000 * 0.88
Sales = $221,760
Variable Cost = $88,200 * 0.88
Variable Cost = $77,616
Percentage Change in sales = ($31,744 - $51,400) / $51,400
Percentage Change in sales = -38.24%
.

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