managerial accounting 522

Example 14: Cost Structure and Operating Leverage Vargo Video and one of its competitors, New Wave Company, both make camcorders. Vargo Video uses a traditional, labor-intensive manufacturing process. New Wave Company has invested in a completely automated system. The factory employees are involved only in setting up, adjusting, and maintaining the machinery. C.V.P Income Statement Sales Variable costs Contribution margin Fixed costs Net income Vargo Video $800,000 480,000 320,000 200,000 $120,000 New Wave Company $800,000 160,000 640,000 520,000 $120,000 1. Effect on Contribution Margin Ratio 2. Effect on Break-Even Point 3. Effect on Margin of Safety 4. Degree of Operating Leverage