Question

The Greenback Store’s cost structure is dominated by variable costs with a contribution margin ratio of 0.40 and fixed costs of $63,900. Every dollar of sales contributes 40 cents toward fixed costs and profit. The cost structure of a competitor, One-Mart, is dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $276,900. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $710,000 for the month.

Required:

a. Compare the two companies’ cost structures.

b. Suppose that both companies experience a 10 percent increase in sales volume. By how much would each company’s profits increase?

Answer 1

(A)  Statement of comparison of cost structure of two companies

Particulars	Greenback Store	One Mart
Amounts	Percentage	Amounts	Percentage
Sales	$ 710,000	100	%	$ 710,000	100	%
Variable costs	$ 426,000	60	%	$ 213,000	30	%
Contribution margin	$ 284,000	40	%	$ 497,000	70	%
Fixed costs	$ 63,900	9	%	$ 276,900	39	%
Operating profit	$ 220,100	31	%	$ 220,100	31	%

b).

Greenback Stores profit increased by	28,400
One-marts profit increased by	49,700

Calculation :

= Contribution Margin*(Sales*Increase %)

Greenback Stores = 0.40*(710,000*0.10) = 28,400

One-Mart = 0.70*(710,000*0.10) = 49,700

kindly give a ?. It helps me. Thanks!!