Analysis of Cost Structure Foxx Company’s cost structure is …

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 t. 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 t. 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.

b. Suppose that both companies experience a 20 percent increase in sales volume. By how much would each company’s profits increase?

Exhibit 3.5.

Lo-Lev Company

Hi-Lev Company

(1,000,000 units)

Percentage

(1,000,000 units)

Percentage

Sales

$1,000,000

100

$1,000,000

100

Variable costs

750,000

75

250,000

25

Contribution margin

$ 250,000

25

$ 750,000

75

Fixed costs

50,000

5

550,000

55

Operating profit t

$200,000

20

$ 200,000

20

Break-even point

200,000 units

733,334 units

Contribution margin per

unit $0.25

$0.75