Question

Question 2. Contribution margin, decision making. McCarthy Men's Clothing's revenues and cost data for 2014 are as follows: $500,000 250,000 250,000 Revenues Cost of goods sold Gross margin Operating costs: Salaries fixed Sales commissions (11% of sales) Depreciation of equipment and fixtures Store rent ($4,000 per month) Other operating costs Operating income (loss) $160,000 55,000 15,000 48,000 40,000 |_ 318,000 $(68,000) Mr. McCarthy, the owner of the store, is unhappy with the operating results. An analysis of other operat-ing 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?

Answer 1

Answer-1:

MCCARTHY MEN'S CLOTHING CVP Statement For the year 2014 $500,000 Revenue Less: Variable cost: $ Cost of goods sold 250,000 Sales commission 55,000 Other operating costs 35,000 Total variable cost 340,000 $ 160,000 Contribution margin

Answer-2

Contribution margin percentage = Contribution margin / Sales × 100 = $160,000 / $500,000 × 100 = 32%

Answer-3

MCCARTHY MEN'S CLOTHING Income Statement For the year 2014 $ 600,000 Revenue Less: Variable cost: $ Cost of goods sold 250,000 Sales commission 55,000 Other operating costs 35,000 Total variable cost 340,000 Contribution margin $260,000 Less: Fixed cost: Salaries 160,000 Depreciation of equipment and fixtures 15,000 Store rent 48,000 Other operating cost 5,000 Advertising cost 12,000 Total variable cost 240,000 $20,000 Net Operating Income

From above, it is noticed that incurring advertising cost of $12,000 has turned net operating loss of McCarty Men's Clothing into net operating income of $20,000. So, it is advisable to go ahead with incurring additional advertising cost.

Answer-4

Mr. McCathy should push his sales to exceed the Break even sales of $712,500 (i.e. $228,000/32 × 100) so as to earn net operating income.