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Chapter 21: Q29PGA (page 1174)

Analyzing profitability

Relative Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs

Sales Price \( 1,400 \) 50

Variable manufacturing costs 1,148 21

Sales commission (8%) 112 4

Relative Furniture has three sales representatives: Abe, Brett, and Corrin. Abe sold 50 tables with 4 chairs each. Brett sold 110 tables with 6 chairs each. Corrin sold 90 tables with 8 chairs each.

Requirements:

  1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places).
  2. Which sales representative has the highest contribution margin ratio? Explain why.

Short Answer

Expert verified
  1. The contribution margin of Abe, Brett, and Corrinis $12,716, $27,894 and $22,912.The contribution margin ratio ofAbe, Brett, and Corrin is 18.11% and 18.08%, and 18.13%respectively.
  2. Abe sales representative has highest contribution margin ration because of appropriate sales-mix.

Step by step solution

01

Calculation of average service revenue per customer, average variable cost per customer, and, average contribution margin per customer (1). 

Particulars

Abe (50 tables and 4 Chairs)

Brett (110 tables and 6 Chairs)

Corrin (90 tables and 8 Chairs)

Sales price

($1,400x50+$50x4) =$70,200

($1,400x110+$50x6) =$154,300

($1,400x90+$50x8) =$126,400

Variable cost

($1,148x50+$21x4) =$57,484

($1,148x110+$21x6) =$126,406

($1,148x90+$21x8) =$103,488

Contribution Margin

$12,716

$27,894

$22,912

Contribution margin ratio (Contribution margin/Sales)

$12,716/$70,200 =18.11%

$27,894/$154,300 =18.08%

$22,912/$126,400 =18.13%

02

Reason forthe difference in the contribution margin ratio between sales representatives (2):

Abe has the highest contribution margin ratio because of the appropriate sales mix.

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Most popular questions from this chapter

: Analyzing profitability Refer to Exercise E21-22. Assume the sales mix shifted to 50% for each product. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

Question: Analyzing profitability Sampler Company sells two products, Sigma and Zeta, with a sales mix of 70% and 30%, respectively. Sigma has a contribution margin per unit of \(26, and Zeta has a contribution margin per unit of \)21. The company sold 700 total units in September. Calculate the total amount each product contributed to the coverage of fixed costs and the total contribution margin for the company.

Question: Using variable costing, service company

Divine Pool Cleaning Service provides pool cleaning services to residential customers. The company has three employees, each assigned to specific customers. The company considers each employee’s territory as a business segment. The company incurs variable costs that include the employees’ wages, pool chemicals, and gas for the service vans. Fixed costs include depreciation on the service vans. Following is the income statement for the month of August:

Requirements

1. Calculate the contribution margin ratio for each business segment.

2. The business segments had the following number of customers: Byson, 80; Moore, 50; and Freeman, 110. Compute the service revenue per customer, variable cost per customer, and contribution margin per customer for each business segment.

3. Which business segment was most profitable? List some possible reasons why this segment was most profitable. How might the various reasons affect the company in the long term?

Computing inventory balances

Zeng Company reports the following data:

Finished Goods Inventory:

Beginning balance, in units 300 Units

Produced 2,900

Units sold (1,600)

Ending balance, in units 1,600

Production Costs: Variable manufacturing costs per unit $ 57

Total fixed manufacturing costs 26,100

Calculate the product cost per unit and the total cost of the 1,600 units in ending inventory using absorption costing and variable costing.

Explain how increasing production can increase gross profit when using absorption costing.

Analyzing profitability

Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018:

East Coast

Midland

West Coast

Units sold

71

69

53

Sales price per unit

\(10,300

\)13,600

\(12,000

Variable cost per unit

6,283

7,072

7,080

Prepare an income statement for Camden Company for 2018 using the contribution margin format assuming total fixed costs for the company were \)435,000. Include columns for each business segment and a column for the total company.

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