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                Saldina Hardware is organized into 3 departments. The following sales and cost data are available...

                Saldina Hardware is organized into 3 departments. The following sales and cost data are available for the prior year.

                                                                Dept A                                  Dept B                                   Dept C

Sales                                                      $265,000                              $850,000                              $900,000

Variable costs                                    106,000                              510,000                              720,000

Contribution Margin                       159,000                              340,000                              180,000

Less fixed costs                                    60,000                                    85,000                                  92,000

Profit                                                     99,000                                 255,000                                 88,000

Required:

a. What is the weighted average contribution margin ratio?

b. What level of sales is needed to earn a profit of $500,000 assuming the current mix?

c. Saldina Hardware places an advertisement in the local paper each week. All else equal, which department would you emphasize in the advertisement?

Solutions

Expert Solution

Dept A Dept B Dept C Total
Sales        265,000        850,000        900,000 2,015,000
Variable costs        106,000        510,000        720,000 1,336,000
Contribution Margin        159,000        340,000        180,000      679,000
Less: Fixed costs           60,000           85,000           92,000      237,000
Profit           99,000        255,000           88,000      442,000
Contribution Margin Ratio 60.00% 40.00% 20.00% 33.70%
Weighted average contribution Margin ratio = Total Contribution Margin/Total Sales
=679000/2015000
33.70%
b.Level of Sales Required = (Desired Profit + Total Fixed costs)/Weighted average Contribution Margin Ratio
=(500,000+237,000)/33.70%
              2,186,943.62
c.Department with highest Contribution Margin Ratio should be emphasised as it will lead to maximum profit
i.e. Departement A

ekkarill92 answered 2 years ago
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