The Greenback Store’s cost structure is dominated by variable costs with a contribution margin ratio of...
The Greenback Store’s cost structure is dominated by variable costs with a contribution margin ratio of 0.30 and fixed costs of $55,200. Every dollar of sales contributes 30 cents toward fixed costs and profit. The cost structure of a competitor, One-Mart, is dominated by fixed costs with a higher contribution margin ratio of 0.80 and fixed costs of $285,200. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $460,000 for the month.
Required:
a. Compare the two companies’ cost structures.
b. Suppose that both companies experience a 15 percent increase in sales volume. By how much would each company’s profits increase?
Homework Answers
| a | ||||
| GREENBACK STORE | ONE-MART | |||
| Amount | Percentage | Amount | Percentage | |
| Sales | 460000 | 100% | 460000 | 100% |
| Variable cost | 322000 | 70% | 92000 | 20% |
| Contribution margin | 138000 | 30% | 368000 | 80% |
| Fixed costs | 55200 | 12% | 285200 | 62% |
| Operating profit | 82800 | 18% | 82800 | 18% |
| b | ||||
| Greenback Store’s profit increase by | 20700 | =460000*15%*30% | ||
| One Mart’s profit increase by | 55200 | =460000*15%*80% | ||
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of $480,000 for the month....
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