Following are actual statements of operating income for Microsoft and Procter & Gamble (in millions):

Assume that the only variable cost for Microsoft is “cost of revenue” and for Procter & Gamble the only variable cost is “cost of products sold.”

1.  Compute the contribution-margin percentage of Microsoft and that of Procter & Gamble. Why do you suppose the percentages are so different?

2. Suppose each company increases its revenue by $10 million. Compute the increase in operating income for each company.

3. Explain how the contribution margin percentage helps you predict the effects on operating income of changes in sales volume. What assumptions do you make in forming such a prediction?

Transcribed Image Text:

Microsoft Procter & Gamble $60,420 Revenues Cost of revenue Research and development $83,503 40,695 Net sales ,598 Cost of products sold 8,164Selling, general, and administrative expenses 25,725 Sales and Marketing General and administrative Operatine income 13,039 5,127 Operating income $17,083