both apple and sell electronic devices, and each of these companies has a different product mix. assume the following data are available for both companies. ($ millions)applesales$ 260,174$ 161,857variable costs122,03486,302fixed costs82,88441,212required:1. compute income for each company.2. compute the degree of operating leverage for each company.3. if unit sales decline, which company would experience the larger decline in income?

Answer:

To compute the income for each company and their respective degrees of operating leverage, we can use the following formulas:

Income (also known as operating income or profit) can be calculated as:

Income = (Sales - Variable Costs) - Fixed Costs

Degree of Operating Leverage (DOL) measures the sensitivity of a company's operating income to changes in sales and can be calculated as:

DOL = (Contribution Margin) / (Income)

Where Contribution Margin = (Sales - Variable Costs)

Let's calculate these for both Apple and the other company:

For Apple:

Sales = $260,174 million

Variable Costs = $122,034 million

Fixed Costs = $82,884 million

Income for Apple:

Income = ($260,174 million - $122,034 million) - $82,884 million

Income = $138,140 million - $82,884 million

Income = $55,256 million

Degree of Operating Leverage (DOL) for Apple:

Contribution Margin = $260,174 million - $122,034 million = $138,140 million

DOL = $138,140 million / $55,256 million ≈ 2.50

For the other company (referred to as Company S in the following calculations):

Sales = $161,857 million

Variable Costs = $86,302 million

Fixed Costs = $41,212 million

Income for Company S:

Income = ($161,857 million - $86,302 million) - $41,212 million

Income = $75,555 million - $41,212 million

Income = $34,343 million

Degree of Operating Leverage (DOL) for Company S:

Contribution Margin = $161,857 million - $86,302 million = $75,555 million

DOL = $75,555 million / $34,343 million ≈ 2.20

Now, to determine which company would experience the larger decline in income if unit sales decline:

The degree of operating leverage (DOL) provides an indication of how sensitive a company's income is to changes in sales. A higher DOL indicates that a company's income is more sensitive to changes in sales.

In this case, Apple has a higher DOL (approximately 2.50) compared to Company S (approximately 2.20). Therefore, if unit sales decline for both companies, Apple would experience a larger decline in income due to its higher operating leverage.