E20-14 The CVP income statements shown below are available for Armstrong Comp an

Question

E20-14 The CVP income statements shown below are available for Armstrong Comp and Contador Company Armstrong Co Contador Co. Sales Variable costs $500,000 50,000 450,000 350,000 $100,000 $500,000 240,000 Contribution margin260.000 Fixed costs 160,000 $ 100,000 Net income Instructions (a) Compute the degree of operating leverage for each company and interpret your results. that sales revenue increases by 100, prepare a variable costing income statement for each company e) Discuss how the icost structure ti these twe ceompanies affects their ope and profitability.

Explanation / Answer

Req a: Armstrong Contador Sales revenue 500000 500000 Less: Variable cost 240000 50000 Contribution 260000 450000 Fixed cost 160000 350000 Net Income 100,000 100,000 Operating Leverage 2.6 4.5 (Contribution/ Income) Req B; Income Statemenet Armstrong Contador Sales revenue 550000 550000 Less: Variable cost 264000 55000 Contribution 286000 495000 Fixed cost 160000 350000 Net Income 126,000 145,000 Req C: The company having higher elment fixed occst in cost structure is having an leverage effect on income. With the increase in sales, in such company, the net income increases quite high as company to other company. Also, with the decrease in sales, net incomes decreases higher than the company having a more variable cost.

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