Problem:
The following variable costing income statements are available for American Company and National Company.
|
American Company
|
National Company
|
|
Sales
|
$1,000,000
|
$1,000,000
|
|
Variable costs
|
500,000
|
150,000
|
|
Contribution margin
|
500,000
|
850,000
|
|
Fixed costs
|
300,000
|
650,000
|
|
Net income
|
$200,000
|
$200,000
|
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 30%, prepare a variable costing income statement for each company.
(d) Assuming that sales revenue decreases by 30%, prepare a variable costing income statement for each company.
(e) Discuss how the cost structure of these two companies affects their operating leverage and profitability.