Following table shows information of company A and Company B. Firm A Firm B Sales Same...
Following table shows information of company A and Company B.
|
Firm A |
Firm B |
|
|
Sales |
Same |
Same |
|
Contribution Margin |
Lower |
Higher |
|
Margin of Safety |
Higher |
Lower |
. Which company should perform better if sales increase by 10% for both companies and why? also Which company should perform better if sales decrease by 10% for both companies and why
Homework Answers
1.Firm A would perform better if sales increase by 10% for both companies because this will increase the margin of safety of firm A as compared to Firm B .Hence Firm A would perform better.
2. If sales decrease by 10% for both companies then both the firm have same rate of margin of safety .
For eg All Figures have been assumed
| Firm A | Firm B | |
| Sales | 100000 | 100000 |
| Variable Ratio | (50000) | (40000) |
| Contribution | 50000 | 60000 |
| Fixed Cost | (20000) | (25000) |
| Net operating Income | 30000 | 35000 |
| Contribution Margin (Contribution / Sales) |
50000 / 100000 |
60000 / 100000 |
| 50% | 60% | |
| Break even point ( Fixed Cost / Contribution Margin) | 20000 / 0.50 | 25000/ 0.60 |
| 40000 | 41667 | |
| Margin of Safety ( sales - Break even point / sales) | 100000 - 40000 /100000 |
100000-41667/ 100000 |
| 60% | 58.33% |
Now above table is as per question that sale should be same, Firm B Contribution Margin should be higher as compared to Firm A and Margin of Safety of Firm A should be higher as compared to Firm B.
1.Now sales increase by 10%
| Firm A | Firm B | |
| Sales | 110000 | 110000 |
| Variable Ratio | (50000) | (40000) |
| Contribution | 60000 | 70000 |
| Fixed Cost | (20000) | (25000) |
| Net operating Income | 40000 | 45000 |
| Contribution Margin (Contribution / Sales) |
60000 / 110000 |
70000 / 110000 |
| 54.5% | 63% | |
| Break even point ( Fixed Cost / Contribution Margin) | 20000 / 0.54 | 25000/ 0.63 |
| 36697 | 39682 | |
| Margin of Safety ( sales - Break even point / sales) | 110000 - 36697/110000 |
110000-39682/ 110000 |
| 66.6% | 63.92% |
2.Sale decrease by 10 %
| Firm A | Firm B | |
| Sales | 90000 | 90000 |
| Variable Ratio | (50000) | (40000) |
| Contribution | 40000 | 50000 |
| Fixed Cost | (20000) | (25000) |
| Net operating Income | 20000 | 25000 |
| Contribution Margin (Contribution / Sales) |
40000 / 90000 |
50000 / 90000 |
| 44.4% | 55.1% | |
| Break even point ( Fixed Cost / Contribution Margin) | 20000 / 0.44 | 25000/ 0.55 |
| 45454 | 45454 | |
| Margin of Safety ( sales - Break even point / sales) | 90000 - 45454/90000 |
90000-45454/ 90000 |
| 49% | 49% |
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