Following are actual statements of operating income for Microsoft and Procter & Gamble (in millions): Microsoft Revenues $60,420 Cost of revenue 11,598 Research and development 8,164 Sales and Marketing 13,039 General and administrative 5,127 Operating income $22,492 Procter & Gamble Net sales $83,503 Cost of products sold 40,695 Selling, general, and administrative expenses 25,725 Operating income $17,083 Assume that the only variable cost for Microsoft is “cost of revenue” and for Procter & Gamble the only variable cost is “cost of products sold.” 1. Compute the contribution-margin percentage of Microsoft and that of Procter & Gamble. Why do you suppose the percentages are so different? 2. Suppose each company increases its revenue by $10 million. Compute the increase in operating income for each company. 3. Explain how the contribution margin percentage helps you predict the effects on operating income of changes in sales volume. What assumptions do you make in forming such a prediction?
Following are actual statements of operating income for Microsoft and Procter & Gamble (in millions):
Microsoft
Revenues $60,420 Cost of revenue 11,598 Research and development 8,164 Sales and Marketing 13,039
General and administrative 5,127
Operating income $22,492
Procter & Gamble
Net sales $83,503 Cost of products sold 40,695 Selling, general, and administrative expenses 25,725 Operating income $17,083
Assume that the only variable cost for Microsoft is “cost of revenue” and for Procter & Gamble the
only variable cost is “cost of products sold.”
1. Compute the contribution-margin percentage of Microsoft and that of Procter & Gamble. Why do
you suppose the percentages are so different?
2. Suppose each company increases its revenue by $10 million. Compute the increase in operating
income for each company.
3. Explain how the contribution margin percentage helps you predict the effects on operating income
of changes in sales volume. What assumptions do you make in forming such a prediction?
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