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
