# Acc346 Managerial Accounting: E6-16 Old Fashion Apples and Mech-Apples (CVP Analysis)

Acc346 Managerial Accounting

E6-16

An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old-Fashion Apples uses a labor-intensive approach, and Mech-Apple uses a mechanized system. CVP income statements for the two companies are shown below.

Old Fashion Apples Mech-Apple

Sales 400,000 400,000

Variable costs 320,000 160,000

Contribution margin 80,000 240,000

Fixed costs 20,000 180,000

Net income 60,000 60,000

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.

a. Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 10.50.) Determine which company's cost structure makes it more sensitive to changes in sales volume.

b. Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 5.0%. Do not prepare income statements. (Use the rounded amount from the previous question when calculating the answer for this question. Round answers to 2 decimal places, e.g. 10.50. If percentage change is negative use either a negative sign preceding the number eg -45 or parentheses eg (45).

c. Which company should the investment banker acquire? Discuss.

E6-16

An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old-Fashion Apples uses a labor-intensive approach, and Mech-Apple uses a mechanized system. CVP income statements for the two companies are shown below.

Old Fashion Apples Mech-Apple

Sales 400,000 400,000

Variable costs 320,000 160,000

Contribution margin 80,000 240,000

Fixed costs 20,000 180,000

Net income 60,000 60,000

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.

a. Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 10.50.) Determine which company's cost structure makes it more sensitive to changes in sales volume.

b. Determine the effect on each company's net income if sales decrease by 10% and if sales increase by 5.0%. Do not prepare income statements. (Use the rounded amount from the previous question when calculating the answer for this question. Round answers to 2 decimal places, e.g. 10.50. If percentage change is negative use either a negative sign preceding the number eg -45 or parentheses eg (45).

c. Which company should the investment banker acquire? Discuss.

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