The CVP income statements shown below are available for Armstrong Company and Contador Company.

Armstrong Co. Contador Co.

Sales $500,000 $500,000 Variable costs 240,000 50,000 Contribution margin 260,000 450,000 Fixed costs 160,000 350,000 Net income $100,000 $100,000 Instructions

(a) Compute the degree of operating leverage for each company and interpret your results.

(b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.

(c) Discuss how the cost structure of these two companies affects their operating leverage and profi tability.

AppendixLO1