Question

Exercise

Assume your Company sells to merchandisers in three different states—Oregon, Texas and Colorado The following profit analysis by state was prepared by the company:

                                                                        Oregon                       Texas                        Colorado

Revenue                                                         4,500,000                    4,000,000                   4,000,000

Cost of Goods Sold                                        2,500,000                      2,000,000                  2,000,000

Gross profit                                                     2,000,000                      2,000,000                  2,000,000

Selling Expenses                                               500,000                         700,000                      700,000

Net profit                                                         1,500,000                      1,300,000                  1,300,000

Following are the fixed portion within the costs provided above:

Fixed manufacturing Costs                             300,000                         500,000                        1,000,000

Fixed Selling and Admin Costs                      300,000                         200,000                           400,000

Now, Management believes it could increase state sales by 20%, without increasing any of the fixed costs, by spending an additional $50,000 per state on advertising. No change in inventories.  

1. Prepare a contribution margin statement by state to determine how much each state operating profit would be for the additional $50000 advertising.

2. Which state will provide the greatest profit return for a $50000 increase in advertising?

3. Why?

Answer 1

Ans: A Company Sales Merchandises in three States Colorado, Oregon and Texas

Particulars		Oregon		Texas		Colorado
			Amount ($)		Amount ($)		Amount ($)
Sales			4,500,000		4,000,000		4,000,000
Increase In sales Due to Advertisement is 20%	A	4,500,000*20%	900,000	4,000,000*20%	800,000	4,000,000*20%	800,000
Variable Cost
Cost of Goods Sold
Total		2,500,000		2,000,000		2,000,000
Less: Fixed		(300,000)		(500,000)		(1,000,000)
Variable Cost			2,200,000		1,500,000		1,000,000
Selling Expenses		500,000		700,000		700,000
Less: Fixed		(300,000)		(200,000)		(400,000)
Variable			200,000		500,000		300,000
Total Variable Cost			2,400,000		2,000,000		1,300,000
Variable Cost 20% increase in Sales due to Increase in Advertisement Cost	B	2,400,000*20%	480,000	2,000,000*20%	400,000	1,300,000*20%	260,000
Contribution Margin	A-B		420,000		400,000		540,000
Less: Fixed Cost
Incremental Advertisement Cost			50,000		50,000		50,000
Incremental Profit	C		370,000		350,000		490,000
Profit as percentage of Sales %	C/A		41.11%		43.75%		61.25%

2) Colorado Provide the highest profit return for a $50000 increase in advertising is Colorado as providing profit at the rate of 61.25% of Sales. Reason for Such higher profit Return is lower Variable cost as compare to other States.