3-35 Contribution margin, decision making. Welch Men’s Clothing’s revenues and cost data for 2017 are as follows: Revenues $600,000 Cost of goods sold (all variable costs) 300,000 Gross margin 300,000 Operating costs: Salaries fixed $140,000 Sales commissions (12% of sales) 72,000 Depreciation of equipment and fixtures 10,000 Store rent ($3,500 per month) 42,000 Other operating costs 45,000 309,000 Operating income (loss) $ (9,000) Mr. Welch, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $30,000 variable costs, which vary with sales volume, and $15,000 (fixed) costs. 1. Compute the contribution margin of Welch Men’s Clothing. 2. Compute the contribution margin percentage. 3. Mr. Welch estimates that he can increase units sold, and hence revenues by 25% by incurring additional advertising costs of $8,000. Calculate the impact of the additional advertising costs on operating income. 4. What other actions can Mr. Welch take to improve operating income? 3-36 Contribution margin, gross margin, and margin of safety. Juicy Beauty manufactures and sells a face cream to small specialty stores in the greater Los Angeles area. It presents the monthly operating income statement shown here to George Lopez, a potential investor in the business. Help Mr. Lopez understand Juicy Beauty’s cost structure. ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ? ? ? ? Units sold 20,000 Revenues $200,000 Cost of goods sold Variable manufacturing costs $110,000 Fixed manufacturing costs 40,000 Total cost of goods sold 150,000 Gross margin 50,000 Operating costs Variable marketing costs Fixed marketing & admin costs 20,000 Total operating costs 30,000 Operating income $ 20,000 Juicy Beauty Operating Income Statement June, 2017 $ 10,000 Recast the income statement to emphasize contribution margin. 2. Calculate the contribution margin percentage and breakeven point in units and revenues for June 2017. 3. What is the margin of safety (in units) for June 2017? 4. If sales in June were only 16,000 units and Juicy Beauty’s tax rate is 30%, calculate its net income. 3-37 Uncertainty and expected costs. Kindmart is an international retail store. Kindmart’s managers are considering implementing a new business-to-business (B2B) information system for processing merchandise orders. The current system costs Kindmart $2,000,000 per month and $55 per order. Kindmart has two options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost of $6,000,000 per month and a variable cost of $45 per order. The fully automated B2B system has a fixed cost of $14,000,000 per month and a variable cost of $25 per order. Based on data from the past two years, Kindmart has determined the following distribution on monthly orders: Monthly Number of Orders Probability 300,000 0.25 500,000 0.45 700,000 0.30 1. Prepare a table showing the cost of each plan for each quantity of monthly orders. 2. What is the expected cost of each plan? 3. In addition to the information system’s costs, what other factors should Kindmart consider before deciding to implement a new B2B system?
3-35 Contribution margin, decision making. Welch Men’s Clothing’s revenues and cost data for 2017 are
as follows:
Revenues $600,000
Cost of goods sold (all variable costs) 300,000
Gross margin 300,000
Operating costs:
Salaries fixed $140,000
Sales commissions (12% of sales) 72,000
Depreciation of equipment and fixtures 10,000
Store rent ($3,500 per month) 42,000
Other operating costs 45,000 309,000
Operating income (loss) $ (9,000)
Mr. Welch, the owner of the store, is unhappy with the operating results. An analysis of other operating
costs reveals that it includes $30,000 variable costs, which vary with sales volume, and $15,000 (fixed) costs.
1. Compute the contribution margin of Welch Men’s Clothing.
2. Compute the contribution margin percentage.
3. Mr. Welch estimates that he can increase units sold, and hence revenues by 25% by incurring additional
advertising costs of $8,000. Calculate the impact of the additional advertising costs on operating
income.
4. What other actions can Mr. Welch take to improve operating income?
3-36 Contribution margin, gross margin, and margin of safety. Juicy Beauty manufactures and sells a
face cream to small specialty stores in the greater Los Angeles area. It presents the monthly operating
income statement shown here to George Lopez, a potential investor in the business. Help Mr. Lopez understand
Juicy Beauty’s cost structure.
?
?
?
?
?
?
?
?
?
??
??
??
??
??
? ? ? ?
Units sold 20,000
Revenues $200,000
Cost of goods sold
Variable
Fixed manufacturing costs 40,000
Total cost of goods sold 150,000
Gross margin 50,000
Operating costs
Variable marketing costs
Fixed marketing & admin costs 20,000
Total operating costs 30,000
Operating income $ 20,000
Juicy Beauty
Operating Income Statement June, 2017
$ 10,000
Recast the income statement to emphasize contribution margin.
2. Calculate the contribution margin percentage and breakeven point in units and revenues for
June 2017.
3. What is the margin of safety (in units) for June 2017?
4. If sales in June were only 16,000 units and Juicy Beauty’s tax rate is 30%, calculate its net income.
3-37 Uncertainty and expected costs. Kindmart is an international retail store. Kindmart’s managers are
considering implementing a new business-to-business (B2B) information system for processing merchandise
orders. The current system costs Kindmart $2,000,000 per month and $55 per order. Kindmart has two
options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system
will have a fixed cost of $6,000,000 per month and a variable cost of $45 per order. The fully automated B2B
system has a fixed cost of $14,000,000 per month and a variable cost of $25 per order.
Based on data from the past two years, Kindmart has determined the following distribution on
monthly orders:
Monthly Number of Orders Probability
300,000 0.25
500,000 0.45
700,000 0.30
1. Prepare a table showing the cost of each plan for each quantity of monthly orders.
2. What is the expected cost of each plan?
3. In addition to the information system’s costs, what other factors should Kindmart consider before deciding
to implement a new B2B system?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
