P6-5A The following CVP income statements are available for Viejo Company and Nuevo
Company.
Viejo Company
Nuevo Company
Sales
$500,000
$500,000
Variable costs
280,000
180,000
Contribution margin
220,000
320,000
Fixed costs
180,000
280,000
Net income
$ 40,000
$ 40,000
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.