Q26E - Horngren'S Financial And Managerial Accounting

Question

Using variable costing, service company Refer to Exercise E21-25. The commercial business segment provided services to 200 customers. The residential business segment provided services to 400 customers. Determine the average amount Sherman Company charged each type of customer for services, the average variable cost per customer, and the average contribution margin per customer, rounded to two decimal places. What caused the difference in contribution margin in the two segments?

Step-by-Step Solution

Answer

• The average revenue charged for each customer for commercial and residential segments is $700 and $600 respectively.
• Variable cost per segment for each customer for commercial and residential segments is $315 and $144 respectively
• The contribution margin of the commercial and residential segments is $385 and $456 respectively.

Step 1: Calculation of average service revenue per customer, average variable cost per customer, and, average contribution margin per customer.

Particulars	Commercial Segment	Residential Segment
Service revenue	$140,000/200 =$700	$240,000/400 =$600
Variable cost	$63,000/200 =$315	$57,600/400 =$144
Contribution Margin	$385	$456

Step 2: Reason forthe difference in the contribution margin in the two segments

The difference in the contribution margin in the two segments is because of the difference in the variable cost. Variable cost per unit is much lower for the residential segment as compared to the commercial segment.