The following CVP income statements are available for Red Company and Blue Company.

Instructions
(a) Compute the break-even point in dollars and the margin of safety ratio for each company.
(b) Compute the degree of operating leverage for each company and interpret your results.
(c) Assuming that sales revenue increases by 20%, prepare a CVP income statement for each company.
(d) Assuming that sales revenue decreases by 20%, prepare a CVP income statement for each company.
(e) Discuss how the cost structure of these two companies affects their operating leverage andprofitability.

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Red Company $400,000 180,000 220,000 170,000 50,000 Blue Company $400,000 80,000 320,000 270,000 50,000 Sales Variable costs Contribution margin Fixed costs Net income