Question: Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million in a start-up firm. He is nervous, however,
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1 million 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 years operations of the two firms he is considering and give him some business advice.
| Company Name | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Larson | Benson | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable cost per unit (a) | $ | 20.00 | $ | 10.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Sales revenue (8,300 units $30.00) | $ | 249,000 | $ | 249,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable cost (8,300 units a) | (166,000 | ) | (83,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution margin | $ | 83,000 | $ | 166,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed cost | (24,000 | ) | (107,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 59,000 | $ | 59,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 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. (Note: Since the number of units increases, both revenue and variable cost will increase.) FILL IN CHART
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