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

Exercise 29

Analysis of Cost Structure

Foxx Company’s cost structure is dominated by variable costs with a contribution margin ratio of .25 and fixed costs of $100,000. Every dollar of sales contributes 25 cents toward fixed costs and profit. The cost structure of a competitor, Beyonce, Inc., is dominated by fixed costs with a higher contribution margin ratio of .80 and fixed costs of $400,000. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $600,000 per 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 20 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 F Company and B Inc., through the following format:

	F Company	B Inc.,
	Amount	Percentage	Amount	Percentage
Sales	$600,000	100	600,000	100
Less: Variable costs	$450,000	75	120,000	20
Contribution margin	$150,000	25	480,000	80
Less: Fixed costs	$100,000	17	400,000	67
Operating profit	$50,000	8	80,000	13

Both the companies have the same sales amount but their operating profit is different. While F Company cost structure is dominated by variable costs with a lower contribution margin ratio of 25%, B Inc., cost structure is dominated by fixed costs with a higher contribution margin ratio of 80%. The operating profit of F Company is $50,000 and of B Inc., is $80,000.

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