Spring Company\'s cost structure is dominated by variable costs with a contribut
ID: 2335517 • 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 C WINTERS COMPANY Sales Variable cost Contribution margins Fixed costs Operating profit 500,000 400,000 100,000 60,000 500,000 150,000 350,000 80 30 201% $ 701 % 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 by28,000 8,000Explanation / Answer
a)
SPRING COMPANY
WINTER COMPANY
Amount
Percentage
Amount
Percentage
Sales
$ 500,000
100
%
$ 500,000
100
%
Variable cost
$ 400,000
80
%
$ 150,000
30
%
Contribution Margin
$ 100,000
20
%
$ 350,000
70
%
Fixed cost
$ 60,000
12
%
$ 310,000
62
%
Operating Profit
$ 40000
8
%
$ 40000
8
%
Operating Profit of Spring Company = Contribution Margin - Fixed cost = 100000 – 60000 = 40000
Operating Profit of Winter Company = Contribution Margin - Fixed cost = 350000 – 310000 = 40000
b)
SPRING COMPANY
WINTER COMPANY
Amount
Percentage
Amount
Percentage
Sales
$ 540,000
100
%
$ 540,000
100
%
Variable cost
$ 432,000
80
%
$ 162,000
30
%
Contribution Margin
$ 108,000
20
%
$ 378,000
70
%
Fixed cost
$ 60,000
11.11
%
$ 310,000
57.41
%
Operating Profit
$ 48000
8.89
%
$ 68000
12.59
%
Increase in sale volume = $500000*1.08 = 540000
Increase in variable cost of Spring Company = 400000*1.08 = 432000
Increase in variable cost of Winter Company = 150000*1.08 = 162000
Spring’s company profits increase by = Increased profit - Previous profit = 48000 – 40000 = 8000
Winter’s company profits increase by = Increased profit - Previous profit = 68000 – 40000 = 28000
SPRING COMPANY
WINTER COMPANY
Amount
Percentage
Amount
Percentage
Sales
$ 500,000
100
%
$ 500,000
100
%
Variable cost
$ 400,000
80
%
$ 150,000
30
%
Contribution Margin
$ 100,000
20
%
$ 350,000
70
%
Fixed cost
$ 60,000
12
%
$ 310,000
62
%
Operating Profit
$ 40000
8
%
$ 40000
8
%
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