Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of 0.20 and fixed costs of $60,000. Every dollar of sales contributes 20 cents toward fixed costs and profit. The cost structure of a competitor, Winters Company, is dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $310,000. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $500,000 per month. Required: a. Compare the two companies' cost structures. b. Suppose that both companies experience an 8 percent increase in sales volume. By how much would each company's profits increase?
Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of 0.20 and fixed costs of $60,000. Every dollar of sales contributes 20 cents toward fixed costs and profit. The cost structure of a competitor, Winters Company, is dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $310,000. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $500,000 per month. Required: a. Compare the two companies' cost structures. b. Suppose that both companies experience an 8 percent increase in sales volume. By how much would each company's profits increase?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Spring Company's cost structure is dominated by variable costs with a contribution margin ratio of 0.20 and fixed costs of $60,000.
Every dollar of sales contributes 20 cents toward fixed costs and profit. The cost structure of a competitor, Winters Company, is
dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $310,000. Every dollar of sales contributes
70 cents toward fixed costs and profit. Both companies have sales of $500,000 per month.
Required:
a. Compare the two companies' cost structures.
b. Suppose that both companies experience an 8 percent increase in sales volume. By how much would each company's profits
increase?
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