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Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $$1,000,000$ in a start$-$up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the past year$$s operations of the two firms he is considering and give him some business advice.

$$Company NameLarsonBensonVariable cost per unit $($a$)$$ $18\mathrm{.}00$$ $9\mathrm{.}00$Sales revenue $(8,300$ units $$ $$31\mathrm{.}00)$$ $257,300$$ $257,300$Variable cost $(8,300$ units $$ a$)(149,400)(74,700)$Contribution margin$ $107,900$$ $182,600$Fixed cost$(24,000)(98,700)$Net income$ $83,900$$ $83,900$

Required

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

If the economy expands in coming years, Larson and Benson will both enjoy a $11$ 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.$)$

If the economy contracts in coming years, Larson and Benson will both suffer a $11$ 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 decreases, both total revenue and total variable cost will decrease.$)$

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