3-20 Comparison of Two Companies (SIA, adapted) Black and White are the owners of the Modern Processing Company and the Oldway Manufacturing Company, respectively. These companies manufacture and sell the same product, and competition between the two owners has always been friendly. Cost and profit data have been freely exchanged. Uniform selling prices have been set by market conditions. Black and White differ markedly in their management thinking. Operations at Modern are highly mechanized and the direct labor force is paid on a fixed-salary basis. Oldway uses manual hourly paid labor for the most part and pays incentive bonuses. Modern's salesmen are paid a fixed salary, whereas Oldway's salesmen are paid small salaries plus commissions. Mr. White takes pride in his ability to adapt his costs to fluctuations in sales volume and has frequently chided Mr. Black on Modern's "inflexible overhead." During 19.2, both firms reported the same profit on sales of $100,000. How- ever, when comparing results at the end of 19-3, Mr. White was startled by the following results:

Sales revenue Costs and expenses Net income Percent on sales MODERN OLDWAY 19.2 19.3 19.2 19.3 $100,000 90,000 $ 10,000 10% $120,000 94,000 $ 26,000 21%% $100,000 $150,000 90,000 130,000 $ 10,000 $ 20,000 10% 13% % On the assumption that operating inefficiencies must have existed, White and his accountant made a thorough investigation of costs but could not uncover any evidence of costs that were out of line. At a loss to explain the lower increase in profits on a much higher increase in sales volume, they have asked you to prepare an explanation. You find that fixed costs and expenses recorded over the two-year period were as follows: Modern Oldway $70,000 each year $10,000 each year 1. Prepare an explanation for Mr. White showing why Oldway's profits for 19.3 were lower than those reported by Modern despite the fact that Oldway's sales had been higher. Show relevant calculations to clarify the issue. 2. Indicate the volume of sales Oldway would have to have had in 19-3 to achieve the profit of $26,000 realized by Modern in 19_3. 3. Comment on the relative future positions of the two companies when there are reductions in sales volume.