Chapter 6, Problem 14E

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:

Rene

HO Incorporation
Contribution margin by salesperson (Northeast)
Particulars	Rene ($)
Sales $\left(\text{36 units }\times \text{ \$15,500}\right)$  (A)	558,000
Less: Variable cost $\left(\text{36 units }\times \text{ \$9,300}\right)$	334,800
Manufacturing margin	223,200
Less: Variable selling expense $\left(\text{ \$558,000}\times \frac{8}{100}\right)$	44,640
Contribution margin (B)	178,560
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	32.00%

Table (1)

Steve

HO Incorporation
Contribution margin by salesperson (Northeast)
Particulars	Steve ($)
Sales $\left(\text{24 units }\times \text{ \$16,000}\right)$  (A)	384,000
Less: Variable cost $\left(\text{24 units }\times \text{ \$8,000}\right)$	192,000
Manufacturing margin	192,000
Less: Variable selling expense $\left(\text{ \$384,000}\times \frac{12}{100}\right)$	46,080
Contribution margin (B)	145,920
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	38.00%

Table (2)

Colleen

HO Incorporation
Contribution margin by salesperson (Southwest)
Particulars	Colleen ($)
Sales $\left(\text{40 units }\times \text{ \$14,000}\right)$  (A)	560,000
Less: Variable cost $\left(\text{40 units }\times \text{ \$8,400}\right)$	336,000
Manufacturing margin	224,000
Less: Variable selling expense $\left(\text{ \$560,000}\times \frac{10}{100}\right)$	56,000
Contribution margin (B)	168,000
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	30.00%

Table (3)

Paul

HO Incorporation
Contribution margin by salesperson (Southwest)
Particulars	Paul ($)
Sales $\left(\text{60 units }\times \text{ \$18,000}\right)$  (A)	1,080,000
Less: Variable cost $\left(\text{60 units }\times \text{ \$9,000}\right)$	540,000
Manufacturing margin	540,000
Less: Variable selling expense $\left(\text{ \$1,080,000}\times \frac{8}{100}\right)$	86,400
Contribution margin (B)	453,600
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	42.00%

Table (4)

Conclusion

Therefore, contribution margin of Rene is $178,560, Steve is $145,920, Colleen is $168,000, and Paul is $453,600. Contribution margin ratio of Rene is 32%, Steve is 38%, Colleen is 30%, and Paul is 42%.

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

HO Incorporation
Contribution margin by territory
Particulars	Northeast
Sales $\left(\text{36 units }\times \text{ \$15,500}\right)+\left(\text{24 units }\times \text{ \$16,000}\right)$(A)	942,000
Less: Variable cost $\left(\text{36 units }\times \text{ \$9,300}\right)+\left(\text{24 units }\times \text{ \$8,000}\right)$	526,800
Manufacturing margin	415,200
Less: Variable selling expense $\left(\$44,640+\$46,080\right)$	90,720
Contribution margin (B)	324,480
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	34.45%

Table (5)

Southwest

HO Incorporation
Contribution margin by territory
Particulars	Southwest
Sales $\left(\text{40 units }\times \text{ \$14,000}\right)+\left(\text{60 units }\times \text{ \$18,000}\right)$ (A)	1,640,000
Less: Variable cost $\left(\text{40 units }\times \text{ \$8,400}\right)+\left(\text{60 units }\times \text{ \$9,000}\right)$	876,000
Manufacturing margin	764,000
Less: Variable selling expense $\left(\$56,000+\$86,400\right)$	142,400
Contribution margin (B)	621,600
Contribution margin ratio $\left(\frac{\text{B}}{\text{A}}\right)\text{×100}$	37.90%

Table (6)