Question:
An investment banker is analyzing two companies that specialize in the production and sale of candied yams. Traditional Yams uses a labor-intensive approach, and Auto-Yams uses a mechanized system. CVP income statements for the two companies are shown below.
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Traditional Yams
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Auto-Yams
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Sales
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$400,000
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$400,000
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|
Variable costs
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320,000
|
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160,000
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Contribution margin
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80,000
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240,000
|
|
Fixed costs
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30,000
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190,000
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|
Net income
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$50,000
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|
$50,000
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The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each companys cost structure might have on its profitability.
Determine which company's cost structure makes it more sensitive to changes in sales volume.
Which company should the investement banker acquire? Discuss.