Question

The Greenback Store’s cost structure is dominated by variable costs with a contribution margin ratio of 0.45 and fixed costs of $103,500. Every dollar of sales contributes 45 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 0.80 and fixed costs of $345,000. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $690,000 for the month. Required: a. Compare the two companies’ cost structures. b. Suppose that both companies experience a 15 percent increase in sales volume. By how much would each company’s profits increase?

Compare the two companies’ cost structures.

	GREENBACK STORE			ONE-MART
	Amount	Percentage		Amount	Percentage
Sales			%			%
Variable cost
Contribution margin			%			%
Fixed costs
Operating profit			%			%

Suppose that both companies experience a 15 percent increase in sales volume. By how much would each company’s profits increase?

Suppose that both companies experience a 15 percent increase in sales volume. By how much would each company’s profits increase?

Suppose that both companies experience a 15 percent increase in sales volume. By how much would each company’s profits increase. Greenback's store profits increase by One Mart's profits increase by

Answer 1

	GREENBACK STORE		ONE-MART
	Amount	Percentage	Amount	Percentage
Sales	690000	100%	690000	100%
Variable cost	379500	55%	138000	20%
Contribution margin	310500	45%	552000	80%
Fixed costs	103500	15%	345000	50%
Operating profit	207000	30%	207000	30%
Increase in sales	103500	=690000*15%
Greenback's store profits increase by	46575	=103500*45%
One Mart's profits increase by	82800	=103500*80%