Question

Cardio World Inc. (CWI) is a sporting goods retailer that specializes in bicycles, running shoes, and related clothing. The firm has become successful by careful attention to trends in cycling, running, and changes in the technology and fashion of sport clothing. In recent years, however, the profit margins have begun to fall, and CWI has decided to employ a contribution income statement to further analyze the company’s profitability. The company has two stores, one in Hartford, Connecticut, and the other in Boston, Massachusetts. The total sales for the two stores for the most recent year are $6,955,000 and $5,805,000 for the Hartford and Boston stores, respectively. Both stores are considered profit centers, and within each store are two profit centers: one for clothing and the other for cycle and running shoes (called "cycle & run" below). The breakdown of sales within the two stores is approximately 50% clothing and 50% cycle & run for Boston but is estimated to be 60%/40% for Hartford due to the greater interest in cycling in the Boston area. CWI is interested in finding the profit contribution of clothing and cycle & run at the Hartford store but not at the Boston store.

Cost of purchases for resale averages 60% of retail value at Boston; at Hartford, the cost is 70% for clothing and 50% for cycle & run. Variable operating costs at each store are similar: 30% of retail sales at Boston, and at Hartford, variable operating costs are 25% of retail sales for the clothing unit and 35% for the cycle & run unit. CWI estimates it has a total of $1,175,000 fixed cost, of which $465,000 cannot be traced to either store; of the remaining $710,000, $405,000 is traceable to the stores and controllable by store managers, and $305,000 can be traced to the stores but cannot be controlled in the short term by the store managers. These fixed costs are estimated to be traceable to the stores as follows:

Fixed Controllable Costs	Percent of Total Cost
Boston		45	%
Hartford total		45
Clothing		50
Cycle & run		30
Could not be traced to clothing or cycling at Hartford		20
Could not be traced to Boston or Hartford		10

Fixed Noncontrollable Costs	Percent of Total Cost
Boston		40	%
Hartford total		50
Clothing		55
Cycle & run		35
Could not be traced to clothing or cycling at Hartford		10
Could not be traced to Boston or Hartford		10

Required:

1. Prepare a contribution income statement for CWI showing the contribution margin, controllable margin, and contribution by profit center for both the Boston and Hartford stores, and also for the clothing and cycle & run units of the Hartford store.

Answer 1

Contribution Margin Statement

	Combined company	Not Allocated	Boston	Hartford	Not Allocated	Clothing	Cycle & Run
Sales Revenue	$             12,760,000		$ 5805000			$                4,161,000	$                2,774,000
Variable Costs
Cost of Sales	$                7,770,700		$                3,471,000			$                2,912,700	$                1,387,000
Operating Costs	$                3,746,650		$                1,735,500			$                1,040,250	$                   970,900
Total Variable Costs (cos+operating cost)	$             11,517,350		$                5,206,500			$                3,952,950	$                2,357,900
Contribution Margin	$                1,202,650		$                   578,500			$                   208,050	$                   416,100
Fixed controllable costs	$                   385,000	$                      38,500	$                   173,250		$                      34,650	$                      86,625	$                      51,975
Fixed non controllable costs	$                   285,000	$                      28,500	$                   114,000		$                      14,250	$                      78,375	$                      49,875
Total Traceable Fixed Costs	$                   670,000	$                      67,000	$                   287,250	$                               -	$                      48,900	$                   165,000	$                   101,850
Profit before non traceable costs	$                   532,650	$                    (67,000)	$                   291,250	$                               -	$                    (48,900)	$                      43,050	$                   314,250
Less Not traceable fixed costs	$ 465000
Net Profit	$                      27,650