Chapter 7, Problem 14E

Sales territory and salesperson profitability analysis

Havasu Off-Road Inc. manufactures and sells a variety of commercial vehicles in the Northeast and Southwest regions. There are two salespersons assigned to each territory. Higher commission rates go to the most experienced salespersons. The following sales statistics are available for each salesperson:

1. a. 1. Prepare a contribution margin by salesperson report. Compute the contribution margin ratio for each salesperson.

   2. Interpret the report.

2. b. 1. Prepare a contribution margin by territory report. Compute the contribution margin for each territory as a percent, rounded to one decimal place.

   2. Interpret the report.

To determine

Calculate the contribution margin ratio for each salesperson.

Explanation of Solution

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.

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%.

To determine

Interpret the profitability report of the salesperson.

Explanation of Solution

Contribution margin and contribution margin ratio of salesperson Paul 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 Rene has a second-highest total contribution margin of $178,560, and Steve has second highest contribution margin ratio of 38%.

To determine

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)

To determine

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 $698,000 more sales and $297,120 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.