Q16E
Question
Moore Company sells both designer and moderately priced fashion accessories. Top management is deciding which product line to emphasize. Accountants have provided the following data:
Per Item
Designer Moderately Priced
Average sales price \(185 \)87
Average variable costs 105 22
Average contribution margin 80 65
Average fixed costs (allocated) 20 10
Average operating income \(60 \)55
The Moore Company store in Grand Junction, Colorado, has 14,000 square feet of floor space. If Moore Company emphasizes moderately priced goods, it can display 840 items in the store. If Moore Company emphasizes designer wear, it can display only 560 designer items. These numbers are also the average monthly sales in units.
Prepare an analysis to show which product the company should emphasize.
Step-by-Step Solution
VerifiedThe company should emphasize on moderately priced productsfor profit maximization.
In business terms, a management refers to an authority responsible for managing and controlling the activities of an entity and its human assets.A management has the authority to develop policies and strategies for abusiness entity and also drafts decisions.
Particulars | Designer ($) | Moderately Priced ($) |
Units displayed per square foot: |
|
|
Designer | (560/14,000)=0.04 | (840/14,000)=0.06 |
Contribution margin per unit | 80 | 65 |
Contribution margin per square foot of display space | (80*0.04)=3.20 | (65*0.06)=3.90 |
Capacity square foot of display space | 14,000 | 14,000 |
Total contribution margin at capacity | (14,000*3.20)=44,800 | (14,000*3.90)=54,600 |
The company should emphasize on moderately priced products because it will provide a higher contribution margin.