Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.
1. If Cover-to-Cover Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
2. If Biblio Files Company wants to increase its profit by $20,000 in the coming year, what must their amount of sales be?
3. What would explain the difference between your answers for (1) and (2)?
The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.
The companies have goals that are not in the relevant range.
Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.
Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.
HERE ARE THE INCOME STATEMENTS FOR BOTH COMPANIES
Cover-to-Cover Company
Contribution Margin Income Statement
For the Year Ended December 31, 20Y7
1 Sales $424,000.00
2 Variable costs:
3 Manufacturing expense $254,400.00
4 Selling expense 21,200.00
5 Administrative expense 63,600.00 339,200.00
6 Contribution margin $84,800.00
7 Fixed costs:
8 Manufacturing expense $5,000.00
9 Selling expense 4,000.00
10 Administrative expense 12,200.00 21,200.00
11 Income from operations $63,600.00
Biblio Files Company
Contribution Margin Income Statement
For the Year Ended December 31, 20Y7
1 Sales $424,000.00
2 Variable costs:
3 Manufacturing expense $169,600.00
4 Selling expense 16,960.00
5 Administrative expense 67,840.00 254,400.00
6 Contribution margin $169,600.00
7 Fixed costs:
8 Manufacturing expense $88,000.00
9 Selling expense 8,000.00
10 Administrative expense 10,000.00 106,000.00
11 Income from operations $63,600.00
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