Spring Company’s cost structure is dominated by variable costs with a contribution margin ratio of 0.30 and fixed costs of $50,000. Every dollar of sales contributes 30 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 $300,000. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $500,000 per month. Required: a. Compare the two companies’ cost structures. 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 cost structure is dominated by variable costs with a contribution margin ratio of 0.30 and fixed costs of $50,000. Every dollar of sales contributes 30 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 $300,000. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $500,000 per month. Required: a. Compare the two companies’ cost structures. b. Suppose that both companies experience a 20 percent increase in sales volume. By how much would each company’s profits increase?

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter11: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 11.16E

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