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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

Explain how the sales mix can affect the profitability of a company.

: 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.

When units produced equal units sold, how does operating income differ between variable costing and absorption costing?

Calculating gross profit and operating income, absorption costing Calculate the gross profit and operating income for June using absorption costing

Use the following information for Short Exercises S21-4 and S21-5.

Dracut Company reports the following information for June:

Net Sales Revenue $ 755,000 Variable Cost of Goods Sold 240,000 Fixed Cost of Goods Sold 198,000 Variable Selling and Administrative Costs 168,000 Fixed Selling and Administrative Costs 79,000

Question: Preparing absorption costing income statements, production exceeds sales

Refer to Exercise E21-16.

Requirements:

  1. Prepare the April income statement using absorption costing.
  2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30.
  3. Is the April 30 balance in Finished Goods Inventory higher or lower than variable costing? Explain why
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