Company\'s cost structure is dominated by variable costs with a contribution mar
ID: 2596152 • Letter: C
Question
Company's cost structure is dominated by variable costs with a contribution margin ratio of 0.45 and fixed costs of $255,600. Every dollar of sales contributes 45 cents toward fixed costs and profit. The cost of a competitor, Winters Company, is dominated by fixed costs with a higher margin ratio of 0.70 and fixed costs of $433,100. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $710,000 per month. Suppose that both companies experience a 10 percent increase in sales volume.
Explanation / Answer
Profit = (Sales x CM ratio) – Fixed cost
Fixed cost has not changed on increase in sales. So increase in profit can be calculated by multiplying sales difference with CM ratio.
Increase in profit for Spring = Increase in sales x CM ratio
= $ 710,000 x 10 % x 0.45
= $ 710,000 x 0.10 x 0.45
= $ 71,000 x 0.45 = $ 31,950
Increase in profit for Winter = Increase in sales x CM ratio
= $ 710,000 x 10 % x 0.70
= $ 710,000 x 0.10 x 0.70
= $ 71,000 x 0.70 = $ 49,700
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