Spring Company\'s cost structure is dominated by variable costs with a contribut
ID: 2339002 • Letter: S
Question
Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of 0.25 and fixed costs of $100,000. Every dollar of sales contributes 25 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 0.80 and fixed costs of $430,000. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $600,000 per month. Required a. Compare the two companies' cost structures. SPRING COMPANY Percen WINTERS COMPANY Amount Amount Percenta Sales Variable cost Contribution margin Fixed costs Operating profit b. Suppose that both companies experience a 20 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
Requirement a
SPRING COMPANY
WINTERS COMPANY
Amount
Percentage
Amount
Percentage
Sales
$ 600,000.00
100.00%
$ 600,000.00
100.00%
Variable Cost
$ 450,000.00
75.00%
$ 120,000.00
20.00%
Contribution Margin
$ 150,000.00
25.00%
$ 480,000.00
80.00%
Fixed Cost
$ 100,000.00
16.67%
$ 430,000.00
71.67%
Operating Profit
$ 50,000.00
8.33%
$ 50,000.00
8.33%
To know Change in net income with change in Sales we have to calculate Operating leverage of each company
Operating Leverage = Contribution margin/Net operating Income
Spring Company
Winters company
Contribution margin
$ 150,000.00
$ 480,000.00
Net Income
$ 50,000.00
$ 50,000.00
Degree of operating leverage
3
9.6
So no when we have calculated operating leverage we can also calculated how much net income is changing with change in Sales revenue
Spring Company
Winters company
(A)
%Change in sales
20%
20%
(B)
Degree of operating leverage
3
9.6
(AxB)
%Change in Net Operating income
60%
192%
Proof
SPRING COMPANY
WINTERS COMPANY
Amount
Percentage
Amount
Percentage
Sales
$ 720,000.00
100.00%
$ 720,000.00
100.00%
Variable Cost
$ 540,000.00
75.00%
$ 144,000.00
20.00%
Contribution Margin
$ 180,000.00
25.00%
$ 576,000.00
80.00%
Fixed Cost
$ 100,000.00
13.89%
$ 430,000.00
59.72%
Operating Profit
$ 80,000.00
11.11%
$ 146,000.00
20.28%
Income before Increase in sales
$ 50,000.00
$ 50,000.00
Income after Increase In Sales
$ 80,000.00
$ 146,000.00
Change in Income
$ 30,000.00
$ 96,000.00
%Change in Income
60%
192%
Spring Company profit Increase by 60%
Winter Company profit increase by 192%
SPRING COMPANY
WINTERS COMPANY
Amount
Percentage
Amount
Percentage
Sales
$ 600,000.00
100.00%
$ 600,000.00
100.00%
Variable Cost
$ 450,000.00
75.00%
$ 120,000.00
20.00%
Contribution Margin
$ 150,000.00
25.00%
$ 480,000.00
80.00%
Fixed Cost
$ 100,000.00
16.67%
$ 430,000.00
71.67%
Operating Profit
$ 50,000.00
8.33%
$ 50,000.00
8.33%
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