Question:
Analysis of Cost Structure Foxx Company's cost structure is dominated by variable costs with a contribution margin ratio of .25 and fixed costs of $100,000. Every dollar of sales contributes 25 cents toward fixed costs and profit t. The cost structure of a competitor, Beyonce, Inc., is dominated by fixed costs with a higher contribution margin ratio of .80 and fixed costs of $400,000. Every dollar of sales contributes 80 cents toward fixed costs and profit t. Both companies have sales of $600,000 per month.
Required
a. Compare the two companies' cost structures using the format shown in Exhibit 3.5.
b. Suppose that both companies experience a 20 percent increase in sales volume. By how much would each company's profits increase?
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Lo-Lev Company
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Hi-Lev Company
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|
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(1,000,000 units)
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Percentage
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(1,000,000 units)
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Percentage
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Sales
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$1,000,000
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100
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$1,000,000
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100
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|
Variable costs
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750,000
|
75
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250,000
|
25
|
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Contribution margin
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$ 250,000
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25
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$ 750,000
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75
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Fixed costs
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50,000
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5
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550,000
|
55
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Operating profit t
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$200,000
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20
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$ 200,000
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20
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Break-even point
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200,000 units
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733,334 units
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Contribution margin per
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unit $0.25
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$0.75
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|