Which company will benefit most from a 15% increase in sales?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
6. 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 $375,000.
The following names are to be considered when completing this problem:
| Operating Income | Variable Costs |
Sales |
| Fixed Costs per Unit | Selling Price per Unit |
Variable Cost per Unit |
| Contribution Margin | Fixed Costs |
Operating Loss |
to help complete this problem. All amounts are rounded to whole dollars and shown with "$" and commas as needed (i.e. $12,345).
- Based on the information given, prepare a complete contribution margin income statement for Company A:
Company A
Contribution Margin Income Statement
Projected
- Based on the information given, prepare a complete contribution margin income statement for Company B:
Compute the degree of operating leverage for both companies:
NOTE: Your answers are to be rounded to two decimal places.
- Company A?
- Company B?
Which company will benefit most from a 15% increase in sales?
NOTE: Your answer is either "A" or "B" - the letter is capitalized and no quotation marks.
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