The CVP income statements shown below are available for Armstrong Company and Contador Company.
|
Armstrong Co.
|
Contador Co.
|
|
Sales
|
$500,000
|
$500,000
|
|
Variable costs
|
240,000
|
50,000
|
|
Contribution margin
|
260,000
|
450,000
|
|
Fixed costs
|
160,000
|
350,000
|
|
Net income
|
$100,000
|
$100,000
|
Instructions
(a) Compute the degree of operating leverage for each company and interpret your results.
(b) Assuming that sales revenue increases by 10%, prepare a variable costing income statement for each company.
(c) Discuss how the cost structure of these two companies affects their operating leverage and profitability.