Exercise 3-34 Analysis of Cost Structure (LO 3-2) Spring Company\'s cost structu
ID: 2329241 • Letter: E
Question
Exercise 3-34 Analysis of Cost Structure (LO 3-2) Spring Company's cost structure is domnated by variable costs wh a contribution margin ratio of 0.45 and fixed costs of S78,000. Every dolar of sales contributes 45 cents toward fixed costs and prot. The cost structuire of a competitor, Winters Company, is dominated by nixed costs with a higher contribution margin rado of 0.80 and fxed costs of $305,500. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companles have saies of $650,000 per month a. Compare the two companies' cost structures. SPRING co Variable cost Contibuton margin Flod costs Operating proit b. Suppose that both companies experienoe a 10 percent increase in sales volume, By how much would each company's profits increase? Company's pronis increaseExplanation / Answer
Solution:
a) Comparing the Two Companies Cost Structures:
b) Spring Company’s profits Increase by $29,250 = [0.45 × ($650,000 × 0.10)]
Winter Company’s profits Increase by $52,000 = [0.80 × ($650,000 × 0.10)]
SPRING COMPANY WINTERS COMPANY Amount Percentage Amount Percentage Sales $650,000 100% $650,000 100% Variable cost $357,500 55% $130,000 20% Contribution margin $292,500 45% $520,000 80% Fixed costs $78,000 12% $305,500 47% Operating profit $214,500 33% $214,500 33%Related Questions
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