Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of .20 and

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Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of .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 .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 using the format shown in Exhibit 3.5.
b. Suppose that both companies experience an 8 percent increase in sales volume. By how much would each company's profits increase?
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Fundamentals of Cost Accounting

ISBN: 978-1259565403

5th edition

Authors: William Lanen, Shannon Anderson, Michael Maher

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