Question

An investment banker is analyzing two companies as possible investments, but is concerned about the impact that each company’s cost structure might have on its profitability. The following CVP income statements are available for Chantal Corp. and Mantle, Inc.

                                              Chantal Corp.                      Mantle, Inc.

Sales revenue                           $700,000                          $700,000

Variable costs                             350,000                            210,000

Contribution margin 350,000                            490,000

Fixed costs                                  225,000                            365,000

Net income                               $125,000                          $125,000

The degree of operating leverage for each company is:

Group of answer choices

Chantal – 2.8; Mantle – 3.9

Chantal – 0.50; Mantle – 0.70

Chantal – 2.8; Mantle – 1.7

Chantal – 0.36; Mantle – 0.26

If sales decrease by 20% for each company, the impact on net income will be:

Group of answer choices

a decrease of 56% for Chantal and a decrease of 34% for Mantle.

a decrease of 20% for Chantal and a decrease of 20% for Mantle.

a decrease of 56% for Chantal and a decrease of 78% for Mantle.

a decrease of 10% for Chantal and a decrease of 14% for Mantle.

Answer 1