1. An analyst is evaluating two companies, Company A and Company B, to understand their performance and risk profiles. Both companies operate in the same industry and have the same sales revenue of $1,000,000. However, Company A has a higher proportion of fixed costs at $600,000 and variable costs at $200,000, while Company B has fixed costs at $400,000 and variable costs at $400,000.

Based on a 10% increase in sales revenue and assuming all other factors remain constant, which of the following statements best represents the type of analysis being conducted?

A) The analyst is conducting a break-even analysis to determine the sales level at which both companies cover all their fixed and variable costs.

B) The analyst is conducting a customer concentration analysis to understand the dependency of companies on certain customers.

C) The analyst is conducting an operating leverage analysis to determine how a change in sales will affect the operating income of both companies.

D) The analyst is evaluating the companies based on their working capital management to understand liquidity.

A private equity firm is conducting due diligence on TechSolutions Inc., a company that specializes in providing IT solutions. The firm is analyzing customer concentration to evaluate dependency risks. The firm has identified the top five customers, and the revenue details are as follows:

• Customer A: $15 million, contributing 20% to the gross margin
• Customer B: $12 million, contributing 18% to the gross margin
• Customer C: $10 million, contributing 15% to the gross margin
• Customer D: $8 million, contributing 12% to the gross margin
• Customer E: $5 million, contributing 10% to the gross margin
• Total Revenue: $70 million
• Total Gross Margin: $35 million

Based on the information provided, which of the following statements is most accurate regarding customer concentration and its impact on the company’s financials?

A) The top five customers account for 71.4% of the total revenue and 75% of the total gross margin, indicating a very high level of customer concentration risk.

B) The top five customers account for 60% of the total revenue and 67% of the total gross margin, indicating a high level of customer concentration risk.

C) The top five customers account for 50% of the total revenue and 55% of the total gross margin, indicating a moderate level of customer concentration risk.

D) The top five customers account for 80% of the total revenue and 85% of the total gross margin, indicating an extremely high level of customer concentration risk.

Answer rating: 100% (QA)

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