Question

Spring Company’s cost structure is dominated by variable costs with a contribution margin ratio of 0.20...

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.

b. Suppose that both companies experience a 8 percent increase in sales volume. By how much would each company’s profits increase?

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Answer #1
a
Spring Company Winters Company
Amount Percentage Amount Percentage
Sales 500000 100% 500000 100%
Variable cost 400000 80% 150000 30%
Contribution margin 100000 20% 350000 70%
Fixed costs 60000 12% 310000 62%
Operating profit 40000 8% 40000 8%
b
Spring Company’s profit increase 8000 =500000*8%*20%
Winters Company’s profit increase 28000 =500000*8%*70%
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