Question

Income statements for three companies are provided below: Company A Company B Company C Sales (20 units) $ 1,000 $ 1,000 $ 1,000 Less variable costs 600 300 − Less fixed costs 200 500 800 Net income $ 200 $ 200 $ 200 Required: (a) Prepare new income statements for the firms assuming each sells one additional unit (i.e. each firm sells 21 units) (b) Briefly describe the effect of cost structure on profitability

Answer 1

Answers
1) new income statements for the firms assuming each sells one additional unit (i.e. each firm sells 21 units)
	( Amount in $ )
Particular	Co. A	Co. B	Co. C
(A) Sales	1,050.00	1,050.00	1,050.00
No of units	21.00	21.00	21.00
Sales value per unit	50.00	50.00	50.00
Less : Variable cost	630	315	0
per unit cost	30.00	15.00	-
Contribution margin (A- B )	420.00	735.00	1,050.00
C. Less Fixed cost ( no change in fixed cost)	200	500	800
Net profit or loss	220.00	235.00	250.00
(b) Briefly describe the effect of cost structure on profitability
Variable expenses increases when per unit sales increases in thus it the important cost for decision making . Variable expenses change as the sales volume changes. More the variable cost , less will be the profit but variable cost can be decrease when the sales volume is less.
Fixed cost does not change even if the sales volume is zero
	( Amount in $ )
Workign Note 1
Particular	Co. A	Co. B	Co. C
(A) Sales	1,000.00	1,000.00	1,000.00
No of units	20.00	20.00	20.00
Sales value per unit	50.00	50.00	50.00
Less : Variable cost	600	300	0
Per unit variable cost	30.00	15.00	-
Contribution margin (A- B )	400.00	700.00	1,000.00
C. Less Fixed cost	200	500	800
Net profit or loss	200.00	200.00	200.00