Calculate the percentage change in profits


Income statements for two different companies in the same industry are as follows:

                                          Company A               Company B

Sales                                  $ 500,000                  $ 500,000

Less: Variable Costs             400,000                     200,000

Contribution Margin            100,000                       300,000

Less: Fixed Costs                   50,000                     250,000

Operating Income                $ 50,000                   $ 50,000

1.Calculate the degree of operating leverage for both companies.

2.Calculate the break-even point in $ for each company. Which company has the higher break-even point? Why?

3.Suppose both companies experience a 50% increase in sales. Calculate the percentage change in profits for each company. Explain why the percentage increase in Company B’s profits are so much larger than Company A’s.

Income statements for two different companies in the same industry are as follows:

                                           Company A               Company B

Sales                                  $ 500,000                  $ 500,000

Less: Variable Costs             400,000                     200,000

Contribution Margin             100,000                   300,000

Less: Fixed Costs                   50,000                     250,000

Operating Income                $ 50,000                   $ 50,000

1.Calculate the degree of operating leverage for both companies.

2.Calculate the break-even point in $ for each company. Which company has the higher break-even point? Why?

3.Suppose both companies experience a 50% increase in sales. Calculate the percentage change in profits for each company. Explain why the percentage increase in Company B's profits are so much larger than Company A's.

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Accounting Basics: Calculate the percentage change in profits
Reference No:- TGS0681506

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