Compare the following two companies:Company A is a retail merchandise firm with current sales of $4,000,000 and a 45% contribution margin. Company A's fixed costs are $600,000.Company B is a service firm with current service revenue of $2,800,000 and a 15% contribution margin. Company B’s fixed costs are $375,000. The following names are to be considered when completing this problem:Operating IncomeVariable CostsSalesFixed Costs per UnitSelling Price per UnitVariable Cost per UnitContribution MarginFixed CostsOperating Loss1. Based on the information given, prepare a complete contribution margin income statement for Company A:Company AContribution Margin Income StatementProjected 2. Based on the information given, prepare a complete contribution margin income statement for Company B:Company BContribution Margin Income StatementProjected 3.Compute the degree of operating leverage for both companies:NOTE: Your answers are to be rounded to two decimal places.Company A Company B 4. Which company will benefit most from a 15% increase in sales? NOTE: Your answer is either "A" or "B"

Step 1 A contribution margin income statement is an income statement in which all variable expenses…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Compare the following two companies:

Company A is a retail merchandise firm with current sales of $4,000,000 and a 45% contribution margin. Company A's fixed costs are $600,000.
Company B is a service firm with current service revenue of $2,800,000 and a 15% contribution margin. Company B’s fixed costs are $375,000.

The following names are to be considered when completing this problem:

Operating Income	Variable Costs	Sales
Fixed Costs per Unit	Selling Price per Unit	Variable Cost per Unit
Contribution Margin	Fixed Costs	Operating Loss

1. Based on the information given, prepare a complete contribution margin income statement for Company A:

Company A
Contribution Margin Income Statement
Projected

2. Based on the information given, prepare a complete contribution margin income statement for Company B:

Company B
Contribution Margin Income Statement
Projected

3.Compute the degree of operating leverage for both companies:

NOTE: Your answers are to be rounded to two decimal places.

Company A
Company B

4. Which company will benefit most from a 15% increase in sales? NOTE: Your answer is either "A" or "B"

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