Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 28

Analysis of Cost Structure

The Dollar Store’s cost structure is dominated by variable costs with a contribution margin ratio of .30 and fixed costs of $30,000. 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 .80 and fixed costs of $280,000. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $500,000 for the month.

Required

a. Compare the two companies’ cost structures using the format shown in Exhibit 3.5.

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b. Suppose that both companies experience a 15 percent increase in sales volume. By how much would each company’s profits increase?

Step 1 of 2

a.

Comparison of cost structures of two companies

Compare the cost structures of two companies D Store and O Mart through the following format:

	D Store	O Mart
	Amount	Percentage	Amount	Percentage
Sales	$500,000	100	$500,000	100
Less: Variable costs	$350,000	70	$100,000	20
Contribution margin	$150,000	30	$400,000	80
Less: Fixed costs	$30,000	6	$280,000	56
Operating profit	$120,000	24	$120,000	24

Although both the companies have the same sales amount, and same operating profit amount, their cost structures are different. While D Store cost structure is dominated by variable costs with a lower contribution margin ratio of 30%, O Mart cost structure is dominated by fixed costs with a higher contribution margin ratio of 80%.

The break-even point in units and contribution margin per unit is not calculated as the volume of sales (in units) is not given.