Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $800,000 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).................................$ 16.00..............................$ 7.00

Sales revenue (8,000 units × $25)....................$200,000..........................$200,000

Variable cost (8,000 units × a)........................(128,000)...........................(56,000)

Contribution margin.....................................$ 72,000.........................$ 144,000

Fixed cost................................................(24,000)...........................(96,000)

Net income.............................................$ 48,000............................$ 48,000

Required

Round your figures to two decimal points in all required computation.

a. Use the Contribution margin approach to compute the operating leverage for each firm.

b. If the economy expands in coming years, Larson and Benson will both enjoy a 10 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.)

c. If the economy contracts in coming years, Larson and Benson will both suffer a 10 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.

d. Write a memo to Arnold Vimka with your analyses and advice.