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Spring Company’s cost structure is dominated by variable costs with a contribution margin ratio of 0.40...

Spring Company’s cost structure is dominated by variable costs with a contribution margin ratio of 0.40 and fixed costs of $88,500. Every dollar of sales contributes 40 cents toward fixed costs and profit. The cost structure of a competitor, Winters Company, is dominated by fixed costs with a higher contribution margin ratio of 0.70 and fixed costs of $265,500. Every dollar of sales contributes 70 cents toward fixed costs and profit. Both companies have sales of $590,000 per month.

Required:

a. Compare the two companies’ cost structures for annual and percentage

   SPRING COMPANY    WINTER COMPANY
ANNUAL    PERCENTAGE    ANNUAL PERCENTAGE

SALES
VARIABLE COST
CONTRIBUTION MARGIN
FIXED COSTS
OPERATING PROFIT

Suppose both companies experience a 10 percent sales increase in sales volume. By how much would each company's profits increase?

SPRING COMPANY PROFITS INCREASE BY HOW MUCH?

WINTER COMPANY PROFITS INCREASE BY HOW MUCH?

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B2 spring compan winter compan monthl $590,000 7,080,000 $354,000|$ 4,248,000| annual percentage monthly annual percentage sales variable cost contribution margin| $236,000|$ fixed costs operating profit $590,000 7,080,000 | $177,000|$ 2,124,000| | $413,000|$ | $265,500|$ 3,186,000| | $147,500|$ 1,770,000| 1 100% 60% 40% 15% 25% 4 1 100% 2,832,000| 1,062,000| 1,770,000| 30% 70% 45% 25% 6 4,956,000| $88,500|$ $147,500|$ 10 if sales increase by 10% spring compan winter compan 12 13 14 15 16 17 18 monthl $649,000|$ 7,788,000| $389,400|$ 4,672,800| $88,500|$ 1,062,000| $171,100|$ 2,053,200| annual percentage monthly annual sales variable cost contribution margin| $259,600|$ fixed costs operating profit 100% 60% 40% 14% 26% | $649,000|$ | $194,700|$ | $454,300|$ | $265500|$ | $188,800|$ 7,788,000| 2,336,400 5,451,600| 3,186,000| 2,265,600| percentage 100% 30% 70% 41% 29% 3,115,200| monthl annual monthl annual increase in operating profit 23,600283,200 41,300$495,600 20 21

for formulas and calculations, refer to the next image -

spring compan winter compan monthl 590000 -C4-C6 ercentage monthl annual C4 12 -D4/SD$4 590000 C5*12 D5/SD$4 F4-F6 annual F4 12 G4/$G$A F5*12 G5/$G$A F6*12 G6/$G$A F7*12 G7/$G$A ercentage sales variable cost contribution margin fixed costs operating profit C7*12 -D7/SD$4 265500 C8 12 D8/SD$4 F6-F7 -C6-C7 if sales increase by 10% spring compan winter compan annual percentage -590000*1.1-C13*12 -D13/$D$13 590000*1.1-F13*12 -G13/$G$13 -C13-C15 C14*12D14/$D$13 -F13-F15 F14 12 -G14/$G$13 -C13*0.4C15*12 -D15/$D$13 -F13 0.7 F15 12 -G15/$G$13 F16 12 G16/$G$13 -C15-C16 C17*12-D17/SD$13 -F15-F16 F1712 G17/$G$13 monthl annual percentage monthly 12 13 14 sales variable cost contribution margin fixed costs operating profit C16 12 -D16/SD$13 265500 16 17 18 monthl annual monthl annual increase in operating profit 20 -C17-C8 D17-D8 F17-F8 -G17-G

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