Analysis of Cost Structure Foxx Company’s cost structure is dominated by variable costs with a contribution margin ratio of .25 and fixed costs of $100,000. Every dollar of sales contributes 25 cents toward fixed costs and profit t. The cost structure of a competitor, Beyonce, Inc., is dominated by fixed costs with a higher contribution margin ratio of .80 and fixed costs of $400,000. Every dollar of sales contributes 80 cents toward fixed costs and profit t. Both companies have sales of $600,000 per month.
Required
a. Compare the two companies’ cost structures using the format shown in Exhibit 3.5.
b. Suppose that both companies experience a 20 percent increase in sales volume. By how much would each company’s profits increase?
Exhibit 3.5.
Lo Lev Company |
Hi Lev Company |
|||
(1,000,000 units) |
Percentage |
(1,000,000 units) |
Percentage |
|
Sales |
$1,000,000 |
100 |
$1,000,000 |
100 |
Variable costs |
750,000 |
75 |
250,000 |
25 |
Contribution margin |
$ 250,000 |
25 |
$ 750,000 |
75 |
Fixed costs |
50,000 |
5 |
550,000 |
55 |
Operating profit t |
$200,000 |
20 |
$ 200,000 |
20 |
Break even point |
200,000 units |
733,334 units |
||
Contribution margin per |
unit $0.25 |
$0.75 |