Question

Philadelphia Company has the following information for March: Sales $455,000 Variable cost of goods sold 240,000 Fixed manufacturing costs 70,000 Variable selling and administrative expenses 52,000 Fixed selling and administrating expenses 35,000 For credit, show all your work Determine the: (a) manufacturing margin (b) contribution margin (c) income from operations for Philadelphia Company.

Answer 1

Basic data:

Sales = $ 455,000

Variable Cost of goods sold = $ 240,000

Fixed manufacturing costs = 70,000

Variable selling & Administrative expenses= $ 52,000

Fixed selling & Administrative expenses = $ 35,000

1. Manufacturing Margin

Manufacturing margin, also called as gross profit margin is the gross profit as a percentage of net sales . It can be calculated as:

Sales(Net)		$ 455,000
Less : Cost of Goods Sold
Variable Cost of goods sold	$ 240,000
Fixed manufacturing costs	$ 70,000	$ 310,000
Gross Profit(Manufacturing margin)		$ 145,000

Therefore, Manufacturing margin ratio ={ Gross Profit/ Sales(Net)} * 100

= ($ 145,000/ $ 455,000)* 100

= 31.868%

2. Contribution Margin

Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales

Sales		$ 455,000
Less: Variable costs:
Variable Cost of goods sold	$ 240,000
Variable selling & Administrative expenses	$ 52,000	$ 292,000
Contribution Margin		$ 163,000

Contribution Margin ratio = Contribution Margin/ Sales * 100

= ($ 163,000/ $ 455,000)*100

= 35.824%

3. Income from operations

Sales		$ 455,000
Less: Variable costs:
Variable Cost of goods sold	$ 240,000
Variable selling & Administrative expenses	$ 52,000	$ 292,000
Contribution Margin		$ 163,000
Less: Fixed Cost
Fixed manufacturing costs	$ 70,000
Fixed selling & Administrative expenses	$ 35,000	$ 105,000
Net Profit(Income from operation)		$ 58,000

Income from operations ratio = Income from operations/ Sales * 100

= ($58,000/ $455,000)*100

= 12.747%