P6-5A The following CVP income statements are available for Old Company and New Company.

 

 

 

  Sales	Old Company $400,000	New Company $400,000
Variable costs	180,000	80,000
Contribution margin	220,000	320,000
Fixed costs	170,000	270,000
Net income	$  50,000	$  50,000

 

 

 

                                                                           

 

Instructions

 

(a)   Compute the break-even point in dollars and the margin of safety ratio for each company.

 

(b)   Compute the degree of operating leverage for each company and interpret your results.

 

(c)    Assuming that sales revenue increases by 20%, prepare a CVP income statement for each company.

 

(d)   Assuming that sales revenue decreases by 20%, prepare a CVP income statement for each company.

(e)    Discuss how the cost structure of these two companies affects their oper- ating leverage and profitability