t Profitability Analysis The marketing segment sales for Caterpillar Inc. (CAT) for a recent year follow: Caterpillar Inc. Machinery and Engines Marketing
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Segment Profitability Analysis
The marketing segment sales for Caterpillar Inc. (CAT) for a recent year follow:
| Caterpillar Inc. Machinery and Engines Marketing Segment Sales (in millions) |
|||||||||||
| Building Construction Products |
Cat Japan |
Core Components |
Earth moving |
Electric Power |
Excavation |
Large Power Systems |
Logistics |
Marine & Petroleum Power |
Mining |
Turbines |
|
| Sales | $2,217 | $1,225 | $1,234 | $5,045 | $2,847 | $4,562 | $2,885 | $659 | $2,132 | $3,975 | $3,321 |
In addition, assume the following information:
| Building Construction Products |
Cat Japan |
Core Components |
Earth moving |
Electric Power |
Excavation |
Large Power Systems |
Logistics |
Marine & Petroleum Power |
Mining |
Turbines |
|
| Variable cost of goods sold as a percent of sales | 45% | 55% | 49% | 51% | 54% | 52% | 53% | 50% | 50% | 52% | 48% |
| Dealer commissions as a percent of sales | 9% | 11% | 8% | 8% | 10% | 6% | 5% | 10% | 9% | 7% | 9% |
| Variable promotion expenses (in millions) | 310 | 120 | 150 | 600 | 200 | 600 | 300 | 75 | 270 | 480 | 400 |
a. Use the sales information and the additional assumed information to prepare a contribution margin by segment report. Round answers to two decimal places, except for contribution margin ratio, which should be rounded to one decimal place. Enter all amounts as positive numbers.
| Caterpillar Inc. | |||||||||||
| Contribution Margin by Segment (assumed) | |||||||||||
| (in millions, except ratio figures) | |||||||||||
| Building Construction Products | Cat Japan | Core Components | Earthmoving | Electric Power | Excavation | Large Power Systems | Logistics | Marine and Petroleum Power | Mining | Turbines | |
| Sales | |||||||||||
| Variable cost of goods sold | |||||||||||
| Manufacturing margin | |||||||||||
| Dealer commissions | |||||||||||
| Variable promotion expenses | |||||||||||
| Variable selling expenses | |||||||||||
| Contribution margin | |||||||||||
| Contribution margin ratio |
b. Prepare a table showing the manufacturing margin, dealer commissions, and variable promotion expenses as a percent of sales for each segment. Round percents to one decimal place, if required. Enter all amounts as positive numbers.
| Caterpillar Inc. | |||||||||||
| Contribution Margin by Segment (assumed) | |||||||||||
| (in millions, except ratio figures) | |||||||||||
| Building Construction Products | Cat Japan | Core Components | Earthmoving | Electric Power | Excavation | Large Power Systems | Logistics | Marine and Petroleum Power | Mining | Turbines | |
| Manufacturing margin | % | % | % | % | % | % | % | % | % | % | % |
| Dealer commissions | % | % | % | % | % | % | % | % | % | % | % |
| Variable promotion expenses | % | % | % | % | % | % | % | % | % | % | % |
| Contribution margin ratio | % | % | % | % | % | % | % | % | % | % | % |
c. All of the following are contributing reasons that Cat Japan is the poorest performing segment except:
a. The manufacturing margin as a percentage of sales is the lowest.
b. The dealer commissions as a percentage of sales are the highest.
c. The variable promotion expenses as a percentage of sales are the highest.
d. The variable cost of goods sold as a percentage of sales is the highest.
e. None of these choices is correct.
The correct answer is:
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