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Chapter 21: Q3TI (page 1158)

The Stark Company manufactures a product that is expected to incur \(20 per unit in variable production costs and sell for \)40 per unit. The sales commission is 10% of the sales price. Due to intense competition, Stark actually sold 200 units for \(38 per unit. The actual variable production costs incurred were \)23.75 per unit. Calculate the total contribution margin and contribution margin ratio at the expected price/costs and the actual price/costs. How might management use this information?

Short Answer

Expert verified

The contribution margin and contribution margin ratioare $3,200 and 40% for estimated and $2,090 and 27.5% for actual respectively.

Management can use this information to lower their variable cost, due to which contribution margin is lower. Management should focus on minimizing the variable cost to expectations to increase the contribution margin. Due to intense competition in the market sale price increment will affect the sales of the company but the cost is in the hands of the company. It can minimize it for better results in the upcoming future.

Step by step solution

01

Profitability analysis based on contribution margin

Particulars

(Expected) Amount

(Actual)

Amount

Net sales revenue

$8,000

$7,600

Less: Variable cost

$4,000

$4,750

Less: Sales commission @ 10% of Sales

$800

$760

Contribution Margin

$3,200

$2,090

02

Profitability analysis based on contribution margin ratio

Particulars

(Expected)

Amount

(Actual)

Amount

Net sales revenue

$8,000

$7,600

Less: Variable cost

$4,000

$4,750

Less: Sales commission

$800

$760

Contribution Margin

$3,200

$2,090

Contribution margin ratio (Contribution margin/net sales revenue)

40%

27.5%

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Most popular questions from this chapter

Question: Communication Activity 21-1

In 100 words or fewer, explain the main differences and similarities between variable costing and absorption costing.

Question: Preparing variable costing income statements, production less than sales

Refer to your answers to Exercise E21-16. In May 2018, ReVitalAde produced 22,000 cases of powdered drink mix and sold 23,000 cases, of which 1,000 were produced in April. The sales price was \(29, variable costs were \)12 per case (\(9 manufacturing and \)3 selling and administrative), and total fixed costs were \(100,000 (\)91,000 manufacturing and $9,000 selling and administrative).

Requirements

  1. Prepare the May income statement using variable costing.
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Question:What is a business segment? Give some examples.

How do service companies differ from manufacturing companies?

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Calculate the unit product cost using absorption costing and variable costing
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