Chapter 20, Problem 20.21EX

Contribution margin reporting and analysis for a service company

The management of East Coast Railroad Company introduced in Exercise 20 improved the profitability of the Atlanta/Baltimore route in May by reducing the price of a railcar from $600 to $500. This price reduction increased the demand for rail services. Thus, the number of railcars increased by 275 railcars to a total of 700 railcars. This was accomplished by increasing the size of each train but not the number of trains. Thus, the number of train-miles was unchanged. All the activity rates remained unchanged.

1. A. Prepare a contribution margin report for the Atlanta/Baltimore route for May. Calculate the contribution margin ratio in percentage terms to one decimal place.
2. B. Prepare a contribution margin analysis to evaluate management’s actions in May. Assume that the May planned quantity, price, and unit cost were the same as April.