Question

The Greenback Store’s cost structure is dominated by variable costs with a contribution margin ratio of 0.40 and fixed costs of $100,800. Every dollar of sales contributes 40 cents toward fixed costs and profit. The cost structure of a competitor, One-Mart, is dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $244,800. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $480,000 for the month. Required: a. Compare the two companies’ cost structures. b. Suppose that both companies experience a 10 percent increase in sales volume. By how much would each company’s profits increase?

Answer 1

Answer:

Cost structure:

$\left[\begin{array}{ccc}& greenback& one-Mart\\ sales&480,000&480,000\\ variable cost&288,000&144,000\\ contribtuion&192,000&336,000\\ fixed&100,800&244,800\\ operating&91,200&91,200\\\end{array}\right]$

a 10% increase in sales generates increase in profits for:

greenback: 19,200

one-Mart:   33,600

Explanation:

10 increase in sales:

480,000 x 10% = 48,000

to calcualte the increase in profit, we multiply the increase in sales by the contribution margin:

greenback 48,000 x 0.4 =  19,200

one-Mart 48,000 x0.7 = 33,600