Exercise 3-34 (Algo) Analysis of Cost Structure (LO 3-2)

The Greenback Stores cost structure is dominated by variable costs with a contribution margin ratio of 0.40 and fixed costs of $100,800. Every dollar of sales contributes 40 cents toward fixed costs and profit. The cost structure of a competitor, One-Mart, is dominated by fixed costs with a higher contribution margin ratio of 0.80 and fixed costs of $268,800. Every dollar of sales contributes 80 cents toward fixed costs and profit. Both companies have sales of $420,000 for the month.

Required:

a. Compare the two companies cost structures.

b. Suppose that both companies experience a 10 percent increase in sales volume. By how much would each companys profits increase?

Derby Phones is considering the introduction of a new model of headphones with the following price and cost characteristics.

Sales price	$	305	per unit
Variable costs		105	per unit
Fixed costs		420,000	per month

Required:

a. What number must Derby sell per month to break even?

b. What number must Derby sell to make an operating profit of $240,000 for the month?