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Exercise 6.31 a-b (Part Level Submission) An investment banker is analyzing two companies that specialize in the production and sale of candied apples. Old-Fashioned Apples uses a labour-intensive approach, and Mech-Apple uses a mechanized system. Variable costing income statements for the two companies are shown below: Sales Old-Fashioned Apples $550,000 275,000 Mech-Apple $550,000 110,000 275,000 440,000 Variable costs Contribution margin Fixed costs Operating income 225,000 390,000 $50,000 $50,000 The investment banker wants to acquire one of these companies. However, she is concerned about the impact that each company's cost structure might have on its profitability. (a) Your answer is correct. Calculate each company's degree of operating leverage. (Round answers to 2 decimal places, e.g. 15.25.) Old-Fashioned: 5.5 Mech-Apple: 8.8 Determine which company's cost structure makes it more sensitive to changes in its sales volume. Present your answer in terms of the contribution margin ratio. Old-Fashioned Apples Mech-Apple Contribution margin ratio 50 % 80 % Mech-Apple will be more sensitive to changes in sales volume. SHOW ANSWER Determine the effect on each company's operating income if (1) Sales decrease by 15%. (Round percentages to 2 decimal places, e.g. 15.259.) Old-Fashioned: decreases Operating Income by 8750 82.5 % or $1 Mech-Apple: decreases - 16000 Operating Income by 132 % or si (2) Sales increase by 10%. (Round percentages to 2 decimal places, e.g. 15.25%.) X Old-Fashioned: increases 77500 Operating income by 55 0% or $ Mech-Apple: Operating income increases 94000 by 88 % or su