Question

In: Accounting

Havasu Off-Road Inc. manufactures and sells a variety of commercial vehicles in the Northeast and Southwest regions.

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Sales Territory and Salesperson Profitability Analysis

Havasu Off-Road Inc. manufactures and sells a variety of commercial vehicles in the Northeast and Southwest regions. There are two salespersons assigned to each territory. Higher commission rates go to the most experienced salespersons. The following sales statistics are available for each salesperson:

Northeast

Southwest

Rene

Steve

Colleen

Paul

Average per unit:

Sales price

$15,500

$16,000

$14,000

$18,000

Variable cost of goods sold

$9,300

$8,000

$8,400

$9,000

Commission rate

8%

12%

10%

8%

Units sold

36

24

40

60

Manufacturing margin ratio

40%

50%

40%

50%

a. 1. Prepare a contribution margin by salesperson report. Compute the contribution margin ratio for each salesperson.

Havasu Off-Road Inc.

Contribution Margin by Salesperson

Rene

Steve

Colleen

Paul

Contribution margin ratio

%

%

%

%

a. 2. Interpret the report.

Paul earns the contribution margin and has the contribution margin ratio. This is because he sells the units, has a commission rate, and sells a product mix with a manufacturing margin. Steve also sells products with a average manufacturing margin but at a commission rate. Colleen has the contribution margin ratio among the four salespersons. Although Rene has a high variable cost of goods sold and also sells products with a average sales price per unit, she has the second total contribution margin.

b. 1. Prepare a contribution margin by territory report. Compute the contribution margin for each territory as a percent, rounded to one decimal place.

Havasu Off-Road Inc.

Contribution Margin by Territory

Northeast

Southwest

Contribution margin ratio

%

%

b. 2. Interpret the report.

The Southwest Region has $ more sales and $ more contribution margin. In the Southwest Region, the salesperson with the highest sales unit volume, has the contribution margin ratio. The Southwest Region has the performance, even though it also has the salesperson with the contribution margin ratio. The Northeast Region contribution margin is than the Southwest Region because of the outstanding performance of .

Solutions

Expert Solution

Answer :

a. 1.

  Havasu Off-Road Inc.
Contribution Margin by Salesperson
Rene Steve   Colleen Paul
Sales ( Sales price*Units sold) $ 558000 $ 384000 $ 560000 $ 1080000
Less - Variable cost of goods sold

$ 334800

( $ 9300*36)

$ 192000

( $ 8000*24)

$ 336000

( $ 8400*40)

$ 540000

( $ 9000*60)

Manufacturing Margin $ 223200 $ 192000 $ 224000 $ 540000

Less - Variable Commision expenses

(Sales*Commission rate)

$ 44640

( $ 558000*8%)

$ 46080

( $ 384000*12%)

$ 56000

( $ 560000*10%)

$ 86400

( $ 1080000*8%)

Contribution Margin

$ 178560 $ 145920 $ 168000 $ 453600

  Contribution Margin ratio

(Contribution Margin *100/sales )

32 % 38 % 30% 42 %

a. 2.

Paul earns the highest contribution margin and has the highest contribution margin ratio. This is because he sells the most units, has a Low commission rate, and sells a product mix with a high manufacturing margin. Steve also sells products with a high average manufacturing margin but at a high commission rate. Colleen has the poorest contribution margin ratio among the four salespersons. Although Rene has a high variable cost of goods sold and also sells products with a Low average sales price per unit, she has the second Highest total contribution margin.

b. 1.

  Havasu Off-Road Inc.
Contribution Margin by Territory
  Northeast   Southwest
Sales   $ 942000 $ 1640000
Less - Variable cost of goods sold

$ 526800

$ 876000

Manufacturing Margin $ 415200 $ 764000

Less - Variable Commision expenses

$ 90720

$ 142400

Contribution Margin

$ 324480 $ 621600

  Contribution Margin ratio

(Contribution Margin *100/sales )

(rounded to one decimal place.)

34.4 % 37.9 %

Working note -1

For  Northeast' sales , Variable cost of goods sold and variable commision expenses figures ...... Add Rene and Steve's sales , Variable cost of goods sold and variable commision expenses

For  Southwest  sales , Variable cost of goods sold and variable commision expenses figures ...... Add Colleen  and Paul 's sales , Variable cost of goods sold and variable commision expenses

b. 2

The Southwest Region has $ 698000 more sales and $ 297120 more contribution margin. In the Southwest Region, the salesperson with the highest sales unit volume, has the highest contribution margin ratio. The Southwest Region has the highest   performance, even though it also has the salesperson with the lowest contribution margin ratio. The Northeast Region contribution margin is less than the Southwest Region because of the outstanding performance of .Paul.


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