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The Task Explained

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Accounting Homework – Q13.6, 13.9, 13.11, RP2

Q13.6

Contribution margin is a more relevant measure to assess the profitability of additional products sold, and only takes into account variable costs. Contribution margin equals net sales minus variable product costs and variable period expenses. In simpler terms, you deduct all expenses from sales that directly increase when volume is scaled up. The rent you pay for your factory is factored into gross profits, for example, but since the rent doesn't increase when you produce more, it isn't a variable cost, and therefore is not considered when you calculate the contribution margin. Similarly, the gasoline used to deliver products to retailers is a variable expense, while the insurance of the trucks is not.  Gross margin represents the percentage of net sales that the firm takes in as gross profit. It equals gross profit divided by net sales. If you have sold $500,000 worth of product, and the cost of goods sold is $300,000, the gross profit is $200,000. The gross margin is $200,000 divided by $500,000 which equals 40 percent. A business should not focus on gross margin exclusively, since you can increase gross margin but end up with less in gross profits. If your gross profits drop to $170,000 and sales decline to $400,000, gross margin would be higher, at 42.5 percent, yet gross profits would be $30,000 lower. – “yourbusiness.azcentral.com”

Q13.9

Total Sales Revenue

Total Variable Costs

Total Contribution Margin

Contribution Margin Ratio

Contribution Margin %

i

50 000

25 000

25 000

0.5:1

50%

ii

100 000

60 000

40 000

0.4:1

40%

iii

100 000

40 000

60 000

0.6

60%

iv

131 200

49 200

82 000

0.625:1

62.5%

v

72 000

42 000

30 000

0.416

41.67%

iv

325 000

200 000

125 000

0.385:1

38.46

Q13.11

Star Fruit : 0.187:1 or 18.7%

Custard Apple : 0.251:1 or 25.1%

Nashi : 0.475:1 or 47.5%

Fred should close down the Star Fruit line as it is the second highest costing variable cots but also generates the second highest sales. The Nashi line is the most successful line as it has the least variable costs but has the highest relative sales.

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