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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: Old-Fashioned Apples Mech-Apple $550,000 $550,000 275,000 110,000 Sales Variable costs Contribution margin Fixed costs Operating income 275,000 225,000 440,000 390,000 $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 80 % 50/% Mech-Apple will be more sensitive to changes in sales volume. (b) Determine the effect on each company's operating income if (1) Sales decrease by 15%. (Round percentages to 2 decimal places, e.g. 15.25%.) Old-Fashioned: Operating Income by % or s Mech-Apple: Operating Income by % or s (2) Sales increase by 10%. (Round percentages to 2 decimal places, e.g. 15.25%.) Old-Fashioned: Operating income by % or s Mech-Apple: Operating income by % or s