Marka and Marko are the owners of the Recent Processing Company (RPC) and the Previous Manufactuing Company (PMC), respectively. These companies manufacture and sell the same product and competition between the two owners has always been friendy. Cost and profit data have been freely exchanged. Uniform selling prices have been set by market conditions. Marka and Marko differ markedy in their management thinking Operations at RPC are highly mecharized and the direct labor force is paid on a fixed salary basis. PMC uses manual howly paid labor for the most part and pays incentive boruses. RPC's salesmen are paid a fixed salary, whereas PMC's salesmen are paid small salaries plus commissions. Mr. Marko takes pride in his ability to adapt his costs to fluctuations in sales volume and has frequently chided Ms. Marka on RPC's "inflexible overhead." Dwing 2002, both firms reported the same profit on sales of $200,000. However, when comparing results at the end of 2003, Mr. Kright was startled by the following results: RPC PMC 2002 2003 2002 2003 Sales revenue $200,000 $240,000 $200,000 $300,000 Costs and expenses 180,000 188,000 180,000 260,000 Net income $ 20,000 $ 52,000 $ 20,000 $ 40,000 Return on sales 10% 21 2/3% 10% 13 14% On the assumption that operating inefficiencies must have existed, Marko 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: RPC PMC $70,000 each year $10,000 each year REQUIRED Prepare an explanation for Mr. Marko showing why PMC's profits for 2003 were lower than those reported by Modern despite the fact that Oldway's sales had been higher. 1. Redo the income statements emphasizing contribution margin 2. Calculate breakeven point for each company. 3. Calculate operating leverage at revenue level of $200,000. 4. Calculate the volume of sales that PMCs would have to have had in 2003 to achieve the profit of $52,000 realized by RPC in 2003. 5. Comment on the relative future positions of the two comparies when there are reductions as well as increases in sales volume