Problem:
The CVP income statements shown below are available for Hoffman Company and Tolan Company.
|
Hoffman Co.
|
Tolan Co.
|
|
Sales revenue
|
$600,000
|
$600,000
|
|
Variable costs
|
280,000
|
80,000
|
|
Contribution margin
|
320,000
|
520,000
|
|
Fixed costs
|
170,000
|
370,000
|
|
Net income
|
$150,000
|
$150,000
|
Instructions
(a) Compute the degree of operating leverage for each company and interpret your results.
(b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.
(c) Discuss how the cost structure of these two companies affects their operating leverage and profitability.