Q12SE - Horngren'S Financial And Managerial Accounting

Question

 Analyzing profitability analysis, service company Burlington Internet Services is an Internet service provider for commercial and residential customers. The company provided the following data for its two types of customers for the month of August:

For each type of customer, determine both the contribution margin per customer and the contribution margin ratio. Round to two decimal places. 

Which type of service is more profitable?                                                       

Step-by-Step Solution

Answer

Answer

 

Contribution per customer for commercial and residential services is $118.4 and $74.4 respectively. Commercial service is more profitable.

 

Step 1: Calculation of contribution margin per customer and contribution margin ratio

Particulars	Commercial	Residential	Total
Number of customers	200	600	800
Service revenue	$32,000	$72,000	$104,000
Less: Variable cost	$8,320	$27,360	$35,680
Contribution Margin	$23,680	$44,640	$68,320
Contribution margin per customer (Contribution margin/number of customers)	$118.40	$74.40
Contribution margin ratio (Contribution margin/net sales revenue)	74%	62%

Step 2: Profitability analysis based on contribution margin per customer and contribution margin ratio

As per the contribution margin per customer and contribution margin ratio, commercial service is more profitable, because it has high contribution margin per customer and high contribution margin ratio.