Chapter 6, Problem 6.5AP

The following CVP income statements are available for Blanc Company and Noir Company.

	Blanc Company	Noir Company
Sales	$500,000	$500,000
Variable costs	280,000	180,000
Contribution margin	220,000	320,000
Fixed costs	170,000	270,000
Net income	$ 50,000	$ 50,000

Instructions

(a) Compute the break-even point in dollars and the margin of safety ratio (round to 3 places) for each company.

(b) Compute the degree of operating leverage for each company and interpret your results.

(c) Assuming that sales revenue increases by 20%, prepare a CVP income statement for each company.

(d) Assuming that sales revenue decreases by 20%, prepare a CVP income statement for each company.

(e) _______ Discuss how the cost structure of these two companies affects their operating leverage and profitability.