Chapter 3, Problem 34E

Analysis of Cost Structure

Spring Company’s cost structure is dominated by variable costs with a contribution margin ratio of .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 .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

1. a.      Compare the two companies’ cost structures using the format shown in Exhibit 3.5.
2. b.      Suppose that both companies experience an 8 percent increase in sales volume. By how much would each company’s profits increase?