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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