Spring Company\'s cost structure is dominated by variable costs with a contribut
ID: 2335100 • Letter: S
Question
Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of 0.20 and fixed costs of $60,000. Every dollar of sales contributes 20 cents toward fixed costs and profit. The cost structure of a competitor, Winters Company, is dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $310,000. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $500,000 per month. Required: a. Compare the two companies' cost structures. SPRING COMPANY WINTERS COMPANY Amount Percentage Amount Percentage Sales Variable cost Contribution margin Fixed costs Operating profit b. Suppose that both companies experience a 8 percent increase in sales volume. By how much would each company's profits increase? Spring Company's profits increase by Winter Company's profits increase byExplanation / Answer
a.
SPRING COMPANY
WINTER COMPANY
Amount
Percentage
Amount
Percentage
Sales
$500,000
100
%
$500,000
100
%
Less: Variable cost
$400,000
$150,000
Contribution margin
$100,000
20
%
$350,000
70
%
Less: Fixed cost
$60,000
$310,000
Operating profit
$40,000
8
%
$40,000
8
%
Explanation:
Variable cost = Sales x (1- contribution margin)
Spring Company’s variable cost = $ 500,000 x (1 - 0.2) = $ 500,000 x 0.8 = $ 400,000
Winter Company’s variable cost = $ 500,000 x (1 - 0.7) = $ 500,000 x 0.3 = $ 150,000
Operating profit % = Operating profit/sales x 100 = $ 40,000/$ 500,000 x 100 = 0.08 x 100 = 8 %
b.
Spring Company’s profit increase by
$ 8,000
Winter Company’s profit increase by
$ 28,000
Explanation:
Increase in profit = contribution margin ratio x increase in sales
Increase in profit of Spring company = 0.2 x $ 500,000 x 0.08 = $ 8,000
Increase in profit of Winter company = 0.7 x $ 500,000 x 0.08 = $ 28,000
SPRING COMPANY
WINTER COMPANY
Amount
Percentage
Amount
Percentage
Sales
$500,000
100
%
$500,000
100
%
Less: Variable cost
$400,000
$150,000
Contribution margin
$100,000
20
%
$350,000
70
%
Less: Fixed cost
$60,000
$310,000
Operating profit
$40,000
8
%
$40,000
8
%
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