Contribution Margin Income Statements for Two Competing Companies Are Provided

question 122

Essay

Contribution margin income statements for two competing companies are provided below: $$\begin{array} { |l|l|l| } \hline &{ \text { Yin Company } } & { \text { Yang Company } } \\\hline \text { Revenue } & \$ 750,000 & \$ 750,000 \\\hline \text { Less variable cosrts } & \underline{300,000} & \underline{525,000} \\\hline \text { Contribution margin } & \$ 450,000 & \$ 225,000 \\\hline \text { Less fixed costs } & \underline{405,000} & \underline{180,000} \\\hline \text { Net income } & \$ 45,000 & \$ 45,000 \\\hline\end{array}$$
Required:
1) Show each company's cost structure by inserting the percentage of the company's revenue represented by each item on the contribution income statement.
2) Compute each company's magnitude of operating leverage.
3) Using the operating leverage measures computed in requirement 2, determine the increase in each company's net income (percentage and amount) if each company experiences a 10 percent increase in sales.
4) Assume that sales are expected to continue to increase for the foreseeable future, which company probably has more desirable cost structure? Why?

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Definitions:

Depreciation Expense

The systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's consumption or the wear and tear over time.

Long-Term Debt

Loans and financial obligations lasting more than one year, used to finance a company's operations or expansions.

Direct Approach

A method in financial accounting that involves reporting major classes of gross cash receipts and payments, providing a clear view of a company's cash flow.

Indirect Approach

A method for preparing the cash flow statement where net income is adjusted for non-cash transactions, deferred taxes, and changes in working capital.