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p19 5a the following cvp income statements are available for red company and blue co 541937

P19-5A The following CVP income statements are available for Red Company and Blue Company.

Red Company

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Blue Company

Sales

$400,000

$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 operating leverage and profitability.

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