Q34PGB - Horngren'S Financial And Managerial Accounting

Question

Analyzing profitability Father Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs Sales Price \( 800   \) 70 Variable manufacturing costs 60025Sales  commission (10%)                           807Relative Furniture has three sales representatives: Adam, Ben, and Caleb. Adam sold 100 tables with 6 chairs each. Ben sold 110 tables with 4 chairs each. Caleb sold 80 tables with 8 chairs each. 

Requirements 

1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places). 

2. Which sales representative has the highest contribution margin ratio? Explain why.

Step-by-Step Solution

Answer

1. The contribution margin ratio ofAdam, Ben and Caleb is25.21% and 25.12% and 25.34%respectively.
2. Caleb has highest contribution margin ratio because of appropriate sales mix.

Step 1: Calculation of total contribution and the contribution margin ratio for each sales representative (a)

Particulars	Adam (100 tables and 6 Chairs)	Ben (110 tables and 4 Chairs)	Caleb (80 tables and 8 Chairs)
Sales price	($800*100+$70*6) =$80,420	($800*110+$70*4) =$88,280	($800*80+$70*8) =$64,560
Variable cost	($600*100+$25*6) =$60,150	($600*110+$25*4) =$66,100	($600*80+$25*8) =$48,200
Contribution Margin	$20,270	$22,180	$16,360
Contribution margin ratio (Contribution margin/Sales)	$20,270/$80,420=25.21%	$22,180/$88,280 =25.12%	$16,360/$64,560 =25.34%

 

Step 2: Reason of difference in the contribution margin ratio between sales representatives (b)

Caleb has the highest contribution margin ratio because of the appropriate sales mix.