Jenny was thrilled that her new car not only had leather seats but also had seat coolers to keep her and her co- pilot comfortable even in the heat of the summer. She felt it was worth it to upgrade for this feature, even though this technology added $700 to the price tag of her vehicle. This purchase also allows Jenny to understand the true value of this product from both the customer and employee side. You see, she worked in the accounting department of the seat cooler component manufacturer, so she was used to thinking about the costs and profitability of this component. Since she could now personally appreciate the product, she decided to take a closer look at last year’s financial performance of these seat coolers as follows: Sales $ 35,000,000 Cost of Goods Sold 22,950,000 Gross Margin 12,050,000 Selling, general & administrative expenses 5,015,000 Operating income $ $ 7,035,000 During that year, the company sold 50,000 units, where one unit includes cooling components for both front seats. The variable SG&A costs were $25 per unit, while the fixed manufacturing costs were $8,450,000. 1. How much of the company’s Cost of Goods sold is variable? Express this in a per-unit amount. 2. How much of the company’s Selling General & Administrative costs are fixed? 3. Help Jenny reformat the above income statement information into a contribution margin format income statement for the same period. Why would Jenny be willing to expend effort to create this income statement format when it was already pulled together in a gross margin income statement? 4. How much gross margin per unit did the company earn? How much contribution margin per unit did the company earn? What does each of these terms mean?
Jenny was thrilled that her new car not only had leather seats but also had seat coolers to keep her and her co- pilot comfortable even in the heat of the summer. She felt it was worth it to upgrade for this feature, even though this technology added $700 to the price tag of her vehicle. This purchase also allows Jenny to understand the true value of this product from both the customer and employee side. You see, she worked in the accounting department of the seat cooler component manufacturer, so she was used to thinking about the costs and profitability of this component. Since she could now personally appreciate the product, she decided to take a closer look at last year’s financial performance of these seat coolers as follows:
|
Sales |
$ 35,000,000 |
|
Cost of Goods Sold |
22,950,000 |
|
Gross Margin |
12,050,000 |
|
Selling, general & administrative expenses |
5,015,000 |
|
Operating income $ |
$ 7,035,000 |
During that year, the company sold 50,000 units, where one unit includes cooling components for both front seats. The variable SG&A costs were $25 per unit, while the fixed
1. How much of the company’s Cost of Goods sold is variable? Express this in a per-unit amount.
2. How much of the company’s Selling General & Administrative costs are fixed?
3. Help Jenny reformat the above income statement information into a contribution margin format income statement for the same period. Why would Jenny be willing to expend effort to create this income statement format when it was already pulled together in a gross margin income statement?
4. How much gross margin per unit did the company earn? How much contribution margin per unit did the company earn? What does each of these terms mean?
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