Contribution margin, decision making. McCarthy Men's ...

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Contribution margin, decision making.
 
  McCarthy Men's Clothing's revenues and cost data for 2014 are as follows:
 
  Revenues 500,000
  Cost of goods sold 250,000
  Gross margin 250,000
  Operating costs:
  Salaries fixed 160,000
  Sales commissions (11 of sales) 55,000
  Depreciation of equipment and fixtures 15,000
  Store rent (4,000 per month) 48,000
  Other operating costs 40,000 318,000
  Operating income (loss) (68,000)
 
  Mr. McCarthy, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes 35,000 variable costs, which vary with sales volume, and 5,000 (fixed) costs.
 
  Required:
  1. Compute the contribution margin of McCarthy Men's Clothing.
  2. Compute the contribution margin percentage.
  3. Mr. McCarthy estimates that he can increase units sold, and hence revenues by 20 by incurring additional advertising costs of 12,000. Calculate the impact of the additional advertising costs on operating income.
  4. What other actions can Mr. McCarthy take to improve operating income?

Question 2

As per AICPA's Code of Professional Conduct, the rules of ________ urge members to not knowingly misrepresent facts or subordinate their judgment to others.
 
  A) general standards
  B) integrity and objectivity
  C) accounting principles
  D) independence and compliance

[xMRAZ]

Answer to Question 1

1. Revenues 500,000
Deduct variable costs:
Cost of goods sold 250,000
Sales commissions 55,000
Other operating costs 35,000 340,000
Contribution margin 160,000

2. Contribution margin percentage = = 32
3. Incremental revenue (20  500,000) = 100,000
Incremental contribution margin
(32  100,000) 32,000
Incremental fixed costs (advertising) 12,000
Incremental operating income 20,000

If Mr. Lurvey spends 12,000 more on advertising, the operating income will increase by 20,000, decreasing the operating loss from 68,000 to an operating loss of 48,000.

Proof (Optional):
Revenues (120  500,000) 600,000
Cost of goods sold (50 of sales) 300,000
Gross margin 300,000

Operating costs:
Salaries and wages 160,000
Sales commissions (11 of sales) 66,000
Depreciation of equipment and fixtures 15,000
Store rent 48,000
Advertising 12,000
Other operating costs:
Variable 42,000
Fixed 5,000 348,000
Operating income  (48,000)

4. To improve operating income, Mr. Wharton must find ways to decrease variable costs, decrease fixed costs, or increase selling prices.

Answer to Question 2

B
Explanation: B) The rules of integrity and objectivity urge members to not knowingly misrepresent facts or subordinate their judgment to others.

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Thank you

[xMRAZ]

No problemo