Question

Two different manufacturing plants, BP Manufacturing and AD Manufacturing, reported the same profit of $50,000 for the month of June. Both companies reported sales of $200,000 (20,000 units of sales) and total costs of $150,000 for the month. However, the companies makeup of total costs are different.

BP's total costs include $100,000 of variable costs and $50,000 of fixed costs.

AD's total costs include $40,000 of variable costs and $110,000 of fixed costs.

If sales for both companies double, which company will report a higher profit due to these increased sales?  Explain your answer.

Answer 1

Question

Answer :

AD Manufacturing compnay will report higher profit after double the sales.

Contribution Margin income Statement
		BP Manufacturing		AD Manufacturing
	Per unit		Per unit
Units		40000		40000
Sales	$10	$4,00,000	$10	$4,00,000
Less: Variable cost	$5	$2,00,000	$2	$80,000
Contribution	$5	$2,00,000	$8	$3,20,000
Less: Fixed Cost		$50,000		$1,10,000
Profit		$1,50,000		$2,10,000
Working Note
Per Unit Cost		BP Manufacturing		AD Manufacturing
Units		20000		20000
Sales Per unit		$200000/20000		$200000/20000
Sales Per unit		10		10
Sales Per unit		$10		$10
Variable Cost per unit		$100000/20000		$40000/20000
Per Unit Cost		5		2
Per Unit Cost		$5		$2