An Investment Banker Is Analyzing Two Companies That Specialize in the Production

question 37

Essay

An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. Roasted Beans Co. uses a labor-intensive approach and Monat Industries uses a mechanized system. Variable costing income statements for the two companies are shown below:
The investment banker is interested in acquiring one of these companies. However, she 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 effect on each company's net income if sales decrease by 10% and if sales increase by 15%. Do not prepare income statements.

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Definitions:

Bipedalism

Is the ability to walk upright on two legs, characteristic of humans and their ancestors.

Spinal Cord

A long, thin, tubular structure made up of nervous tissue, which extends from the brain down the back, transmitting nerve signals between the brain and the rest of the body.

Human Childbirth

The process of delivering a baby from the uterus to the outside world, typically through stages of labor and delivery.

Birth Canal

The passageway comprising the cervix, vagina, and vulva through which a fetus travels during birth.