Draw two break-even graphs--one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms' profits Solution: Labor-Intensive and capital-intensive break-even graphs Labor-Intensive Capital-Intensive Revenue and costs Revenue and costs Total revenue Total revenue Total costs Total costs BE Variable cost Variable cost Fixed costs Units produced and sold Units produced and sold The company having the high fixed costs will have lower variable costs than its competitor since it has substituted capital for labor. With a lower variable cost, the high fixed cost company will have a larger contribution margin. Therefore, when sales rise, its profits will increase faster than the low fixed cost firm and when the sales decline the reverse will be true Copyright o2005 by The McGranr-Hill Companies, Inc. S-166Copyright © 2005 by The McGraw-Hill Companies, Inc. S-166 5-7. Draw two break-even graphs—one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and have identical sales, explain the impact of changes in sales volume on both firms' profits. Solution: Labor-Intensive and capital-intensive break-even graphs Revenue and costs Revenue and costs Total revenue Total revenue Profits Profits Total costs Total costs Variable cost Variable cost Fixed costs Units produced and sold Units produced and sold BE BE Labor-Intensive Capital-Intensive The company having the high fixed costs will have lower variable costs than its competitor since it has substituted capital for labor. With a lower variable cost, the high fixed cost company will have a larger contribution margin. Therefore, when sales rise, its profits will increase faster than the low fixed cost firm and when the sales decline, the reverse will be true