A venture capitalist facing two alternative investment opportunities. Ensley Company- Variable cost per unit:$21.00, sales revenue:8000 units x$28=$224,000, variable cost:8000 units xa=($84,000), contribution margin: $56,000, fixed cost:: ($25000), Net income: $31,000 Kelley Company- Variable cost per unit:$10.50, sales revenue:8000 units x$28=$224,000, variable cost:8000 units xa=($168,000), contribution margin: $140,000, fixed cost:: ($109,000), Net income: $31,000
a) Use the contribution margin approach to compute the operating leverage for each firm.
b) If the economy expands in coming years, Ensley and Kelley will both enjoy a 10 percent per year increase in sales, assuming that the selling price remains unchanged. Compute the change in the net income for each firm in dollar amount and in percentage.*Because the number of units increase, both revenue and variable cost will incrase.
c) If the economy contracts in coming years, Ensley and Kelley will both suffer a 10 percent decrease in sales volume, assuming that the selling price remains unchanged. Compute the change in the net income for each firm in dollar amount and in percentage.*Because the number of units increase, both total revenue and total variable cost will decrease.
d) Write a memo to the venture capitalist with your analysis and advice.