Chapter 20, Problem 20.14EX

A.

1.

To determine

Variable Costing

Managers frequently use variable costing for internal purposes for taking decision making. The cost of goods manufactured includes direct materials, direct labor, and variable factory overhead. Fixed factory overhead treated as period (fixed) expense.

Contribution Margin

Contribution margin is the excess of manufacturing margin above selling and administrative expenses. Contribution margin is calculated by deducting the variable cost from sales or deducting variable selling and administrative expenses from manufacturing margin.

To calculate: The contribution margin ratio for each salesperson.

Explanation of Solution

The contribution margin ratio for each salesperson is as follows:

C.G

Incorporation RI
Contribution margin by salesperson (Northeast)
Particulars	C.G ($)
Sales $\left(\text{28 units }\times \text{ \$96,000}\right)$ (A)	2,668,000
Less: Variable cost $\left(\text{28 units }\times \text{ \$57,600}\right)$
Manufacturing margin	1,612,800
Less: Variable selling expense $\left(\text{ \$2,688,000}\times \frac{12}{100}\right)$	322,560
Contribution margin (B)	752,640
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	28.00%

Table (1)

To.

Incorporation RI
Contribution margin by salesperson (Northeast)
Particulars	To. ($)
Sales $\left(\text{24 units }\times \text{ \$84,000}\right)$ (A)	2,016,000
Less: Variable cost $\left(\text{24 units }\times \text{ \$33,600}\right)$	806,400
Manufacturing margin	1,209,600
Less: Variable selling expense $\left(\text{ \$2,016,000}\times \frac{16}{100}\right)$	322,560
Contribution margin (B)	887,040
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	44.00%

Table (2)

T

Incorporation RI
Contribution margin by salesperson (Southwest)
Particulars	T ($)
Sales $\left(\text{24 units }\times \text{ \$108,000}\right)$ (A)	2,592,000
Less: Variable cost $\left(\text{24 units }\times \text{ \$64,800}\right)$	1,555,200
Manufacturing margin	1,036,800
Less: Variable selling expense $\left(\text{ \$2,592,000}\times \frac{16}{100}\right)$	414,720
Contribution margin (B)	622,080
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	24.00%

Table (3)

J

Incorporation RI
Contribution margin by salesperson (Southwest)
Particulars	J ($)
Sales $\left(\text{38 units }\times \text{ \$78,000}\right)$ (A)	2,964,000
Less: Variable cost $\left(\text{38 units }\times \text{ \$31,200}\right)$	1,185,600
Manufacturing margin	1,778,400
Less: Variable selling expense $\left(\text{ \$2,964,000}\times \frac{12}{100}\right)$	355,680
Contribution margin (B)	1,422,720
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	48.00%

Table (4)

Conclusion

Therefore, contribution margin of C.G is $752,640, To. is $887,040, T is $622,080, and J is $1,422,720.Contribution margin ratio of C.G is 28%, To. is 44%, T is 24%, and J is 48%.

2.

To determine

To interpret: The profitability report of the salesperson.

Explanation of Solution

Contribution margin and contribution margin ratio of salesperson J is higher than the other three salespeople because he sells the more units than others, has a low commission rate, and product mix with high manufacturing margin ratio. Salesperson To. has a second-highest total contribution margin of $887,040, and second highest contribution margin ratio of 44%.

B.

1.

To determine

To calculate: The contribution margin ratio for each territory.

Explanation of Solution

The contribution margin ratio for each territory is as follows:

Northeast

Incorporation RI
Contribution margin by territory
Particulars	Northeast
Sales $\left(\text{28 units }\times \text{ \$96,000}\right)+\left(\text{24 units }\times \text{ \$84,000}\right)$(A)	4,704,000
Less: Variable cost $\left(\text{28 units }\times \text{ \$57,600}\right)+\left(\text{24 units }\times \text{ \$33,600}\right)$	2,419,200
Manufacturing margin	2,284,800
Less: Variable selling expense $\left(\$322,560+\$322,560\right)$	645,120
Contribution margin (B)	1,639,680
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	34.86%

Table (5)

Southwest

Incorporation RI
Contribution margin by territory
Particulars	Southwest
Sales $\left(\text{24 units }\times \text{ \$108,000}\right)+\left(\text{38 units }\times \text{ \$78,000}\right)$ (A)	5,556,000
Less: Variable cost $\left(\text{24 units }\times \text{ \$64,800}\right)+\left(\text{38 units }\times \text{ \$31,200}\right)$	2,740,800
Manufacturing margin	2,815,200
Less: Variable selling expense $\left(\$414,720+\$355,680\right)$	770,400
Contribution margin (B)	2,044,800
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	36.80%

Table (6)

2.

To determine

To State: The advice regarding the relative profitability of two territories.

Explanation of Solution

The southwest region contribution margin and contribution margin ratio are higher than the northeast region because the southwest region has $852,000 more sales and $405,120 more contribution margin. In addition, the salesperson in the southwest region has the highest unit sold, highest sales price and lowest commission margin. In the northeast region, salespersons are performed very poor than others, and they are trying to improve their sales performance.