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:
- a. 1. Prepare a contribution margin by salesperson report. Compute the contribution margin ratio for each salesperson.
2. Interpret the report.
- 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.
A.1.

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 ($) |
Sales | 558,000 |
Less: Variable cost | 334,800 |
Manufacturing margin | 223,200 |
Less: Variable selling expense | 44,640 |
Contribution margin (B) | 178,560 |
Contribution margin ratio | 32.00% |
Table (1)
Steve
HO Incorporation | |
Contribution margin by salesperson (Northeast) | |
Particulars | Steve($) |
Sales | 384,000 |
Less: Variable cost | 192,000 |
Manufacturing margin | 192,000 |
Less: Variable selling expense | 46,080 |
Contribution margin (B) | 145,920 |
Contribution margin ratio | 38.00% |
Table (2)
Colleen
HO Incorporation | |
Contribution margin by salesperson (Southwest) | |
Particulars | Colleen($) |
Sales | 560,000 |
Less: Variable cost | 336,000 |
Manufacturing margin | 224,000 |
Less: Variable selling expense | 56,000 |
Contribution margin (B) | 168,000 |
Contribution margin ratio | 30.00% |
Table (3)
Paul
HO Incorporation | |
Contribution margin by salesperson (Southwest) | |
Particulars | Paul($) |
Sales | 1,080,000 |
Less: Variable cost | 540,000 |
Manufacturing margin | 540,000 |
Less: Variable selling expense | 86,400 |
Contribution margin (B) | 453,600 |
Contribution margin ratio | 42.00% |
Table (4)
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%.
A.2.

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%.
B.1.

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 | 942,000 |
Less: Variable cost | 526,800 |
Manufacturing margin | 415,200 |
Less: Variable selling expense | 90,720 |
Contribution margin (B) | 324,480 |
Contribution margin ratio | 34.45% |
Table (5)
Southwest
HO Incorporation | |
Contribution margin by territory | |
Particulars | Southwest |
Sales | 1,640,000 |
Less: Variable cost | 876,000 |
Manufacturing margin | 764,000 |
Less: Variable selling expense | 142,400 |
Contribution margin (B) | 621,600 |
Contribution margin ratio | 37.90% |
Table (6)
B. 2.

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.
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Chapter 7 Solutions
Managerial Accounting
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