a.
Compute contribution margin ratio for each line of products.
a.
Explanation of Solution
Contribution Margin Ratio: The contribution margin ratio shows the amount of difference in the actual sales value and the variable expenses in percentage. This margin indicates that percentage which is available for sale above the fixed costs and the profit.
Following formula is used to calculate contribution margin ratio:
Calculate the contribution margin ratio for each line of products:
Product shoes:
Product shorts:
Hence, the contribution margin ratio for product shoes is 30% and for product shorts is 80%.
b.
Compute the following assuming the current sales mix:
- 1. Average contribution margin ratio of total monthly sales.
- 2. Monthly operating income.
- 3. Monthly break-even sales volume.
b.
Explanation of Solution
Sales mix: Sales mix refers to the relative percentage of the total sales based on the provided number of products. In other words, it is expressed as a percentage of units sold for each product with respect to the total units sold for all the products.
- 1. Calculate the average contribution margin ratio of total monthly sales:
Particulars | Contribution margin ratio |
From shoes | 24% |
From shorts | 16% |
Average contribution margin ratio | 40% |
Table (1)
Working notes:
Calculate the average contribution margin ratio for product shoes:
Calculate the average contribution margin ratio for product shorts:
- 2. Calculate the monthly operating income.
Step 1: Calculate total contribution margin.
Step 2: Calculate the monthly operating income.
- 3. Calculate the monthly break-even sales volume in dollars:
c.
Compute the following assuming the new sales mix:
- 1. Average contribution margin ratio of total monthly sales.
- 2. Monthly operating income.
- 3. Monthly break-even sales volume.
c.
Explanation of Solution
Sales mix: Sales mix refers to the relative percentage of the total sales based on the provided number of products. In other words, it is expressed as a percentage of units sold for each product with respect to the total units sold for all the products.
- 1. Calculate the average contribution margin ratio of total monthly sales:
Particulars | Contribution margin ratio |
From shoes | 21% |
From shorts | 24% |
Average contribution margin ratio | 45% |
Table (1)
Working notes:
Calculate the average contribution margin ratio for product shoes:
Calculate the average contribution margin ratio for product shorts:
- 2. Calculate the monthly operating income.
Step 1: Calculate total contribution margin.
Step 2: Calculate the monthly operating income.
- 3. Calculate the monthly break-even sales volume in dollars:
d.
Explain the changes in the company’s financial position so significantly with the new sales mix.
d.
Explanation of Solution
In the new sales mix, sales of shorts overcame some types of sales of shoes as shorts contribute a much higher margin than shoes. That says the sales of shorts in a particular sales volume contribute more than that of shoes, generate a good income and avoid break even by reducing the sales volume.
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