Question

3. Company A's cost structure included costs that are mostly variable. Whereas Company B's cost structure to include costs that are mostly fixed. In a time of increasing sales, which company will tend realize the most rapid increase in profits? Explain.

Answer 1

Solutions Company A's cost structure included costs that are mostly bariable whereas Company B's cost staucture included costs that are mostly Gxed. In a time of increasing sales, company B's lost structure i e. Gixed cost is more efficiently because giu variable cost structure cost is going proportionate with increase with sale but on fixed cost structure, early profit is not that much as compared to variable cost structure but after some point where sales is increasing Constanly Gxed cost structure is more efficient. we can understood this by given following example. Company A Sales Price = Rs so per unit Raw Material - RS ao per unit Labour. Rsico led out Commission : 10% on sales value fixed cost & Ro 1000 vorable) unit increased cipto 200 Units - low , Company B Labour & Rs Commission - doo loro Rs Sour f fixed

Noio, company Als structure which included costs that are mostly variable and company B's structure which includes mostly Gixed cost Variable loo Onits) 20 Uniti Soooo 100000 fixed low Units 200 hits SOooo louco Sales Price (sw) Lessi- Rawo Material Qaco) Labour (310/ 100oro for fixed 20000 yoouo 2000 20000 10000 Yoooo 1oooo Commission 1Q/. on Salelue Soon fixed sooo . loooo Soow sooo Sooo 30000 Sooo 4good Contribution Less: fixed cost 100 ou බලන 1600 10000 sooo 20000 sow Broor As we con saw that in Variable profit increased only a looo as increases whereas in fixed profit un creas 73000 Company B will tend realise rapid increase un profit as cost structure sales quantity cost structure & the sale most increases