Question 1:Cost Volume Profit Analysis(25 marks) Mr. High and Mr. Lowe are the presidents of their respective companies. The two firms manufacture and sell the same product, and due to the competitive nature of the market, they charge the same selling price of $10 per unit.High and Lowe differ regarding their production and management philosophies. The High Company is almost completely automated, and the labor force is paid on a fixed salary basis. The Lowe Company uses a high degree of manual labor paid on an hourly basis. The sales force at the High Company is paid fixed annual salaries with very small commissions, whereas the sales force at Lowe Company is paid strictly on a commission basis. Mr. Lowe constantly makes fun of Mr. High's operations, saying the High Company is inflexible and unable to adjust costs as sales volume fluctuates.During 2011, both firms reported net income of $12,000 on sales of $120,000. However, Mr. Lowe was shocked when examining the results for 2012, which showed that High Company's profits were ahead of Lowe Company's, even though Lowe Company had higher sales.

The results for the two years are as follows:

High Company LoweCompany

2011 2012 2011 2012

Sales revenue $ 120,000 $ 150,000 $ 120,000 $ 180,000

Total costs 108000 117000 108000 153000

Net income 12000 33000 12000 27000

Fixed costs $ 72,000 $ 72,000 $ 18,000 $ 18,000

Mr. Lowe is trying to figure out why the profit increase of his company was less than that of High Company. His company's accountants carefully examined the costs for each year and found no operating inefficiencies or costs that were out of line. He has hired you as aconsultant to help solve the dilemma.Required: A. Compute the break-even point in units, break-even point in dollar sales and the margin of safety (in units and percentage) for each company in 2011 and 2012.(6 marks) B. Present the income statements for 2011 and 2012 for both companies in contribution margin format.(8 marks)C. Prepare an explanation for Mr. Lowe showing why Lowe Company's profits for 2012 were lower than those reported by High Company despite the fact that Lowe Company's sales werehigher. Use the concept of operating leverage for your analysis.(6 marks) D. Comment on the relative position of the two companies if sales in the future begin to decline. (5 marks)