Question

24-12. Cost-volume-profit analysis. Three cor.panies are each producing and selling annually 10,000 units of a similar product at a unit sales price of $10. The companies have fixed and var able costs as follows: COMPANY FIxED CoST $20,000 40.000 60,000 VARIABLE COST PER UNIT $6 Each company contemplates a price cut, from $10 to $8, in the expectation that sales w increase from 10,000 to 15,000 units per year Required (1) The contribution margin and operating income for each company at the present activity (2 The contribution margin and operating income for each company at the contemplated (3) Explanation of the differences in the answers computed in (1) and (2) price and sales level. Based on an article in The Accounting

Answer 1

ANS 1 Present Level

Particulars	A	B	C
Sales	100,000	100,000	100,000
Less: Variable Cost	60,000	40,000	20,000
Contribution	40,000	60,000	80,000
Less: Fixed Cost	20,000	40,000	60,000
Operating Income	20,000	20,000	20,000

ANS 2 Contemplated Level

Particulars	A	B	C
Sales	120,000	120,000	120,000
Less: Variable Cost	90,000	60,000	30,000
Contribution	30,000	60,000	90,000
Less: Fixed Cost	20,000	40,000	60,000
Operating Income	10,000	20,000	30,000

ANS 3

The difference in profits of the companies is due to the variable price per unit. Since the variable price per unit is higher in the company A which yields to Lower Contribution and ultimately to lower operating profit and vice a versa case in company C