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Segment Contribution Margin Analysis

The operating revenues of the three largest business segments for Time Warner, Inc., for a recent year follow. Each segment includes a number of businesses, examples of which are indicated in parentheses.

Time Warner, Inc. Segment Revenues (in millions)
Turner (cable networks and digital media)	$75,400
Home Box Office (pay television)	44,300
Warner Bros. (films, television, and videos)	63,100

Assume that the variable costs as a percent of sales for each segment are as follows:

Turner	47%
Home Box Office	49%
Warner Bros.	43%

a Determine the contribution margin and contribution margin ratio for each segment from the information given. Round contribution margin ratio to whole percents for each segment from the information given. Enter all amounts as positive numbers.

	Turner		Home Box Office		Warner Bros.
Revenues	$		$		$
Variable costs
Contribution margin	$		$		$
Contribution margin ratio (as a percent)		%		%		%

b. Does your answer to (b) mean that the other segments are more profitable businesses?

The higher contribution margin ratio of a segment should not be interpreted as being the profitable. If the volume of business is not sufficient to exceed the break-even point, then the segments would be . In the final analysis, the fixed costs also should be considered in determining the overall profitability of the segments. The shows how sensitive the profit will be to changes in volume.

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	$13,000		$15,800		$9,900		$18,500
Variable cost of goods sold	$7,800		$8,848		$6,336		$8,880
Commission rate	9%		14%		12%		9%
Units sold	30		27		40		40
Manufacturing margin ratio	40%		44%		36%		52%

a. 1. Prepare a contribution margin by salesperson report. Calculate the contribution margin ratio for each salesperson. If required, round contribution margin ratio to one decimal place.

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. Calculate the contribution margin for each territory. If required, round contribution margin ratio 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 and contribution margin ratio. The Northeast Region contribution margin is than the Southwest Region because of the outstanding performance of .

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Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (45,100 units) during the first month, creating an ending inventory of 4,100 units. During June, the company produced 41,000 garments during the month but sold 45,100 units at $110 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

	Number of Units		Unit Cost		Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	4,100		$44.00		$180,400
Fixed	4,100		17.00		69,700
Total			$61.00		$250,100
Manufacturing costs in June:
Variable	41,000		$44.00		$1,804,000
Fixed	41,000		18.70		766,700
Total			$62.70		$2,570,700
Selling and administrative expenses in June:
Variable	45,100		22.10		$996,710
Fixed	45,100		7.00		315,700
Total			29.10		$1,312,410

a. Prepare an income statement according to the absorption costing concept for June.

Joplin Industries Inc.
Absorption Costing Income Statement
For the Month Ended June 30
		$
Cost of goods sold:
	$
		$
		$

b. Prepare an income statement according to the variable costing concept for June.

Joplin Industries Inc.
Variable Costing Income Statement
For the Month Ended June 30
		$
		$
		$
Fixed costs:
	$
		$

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the income statement will have a lower income from operations.

Absorption and Variable Costing Income Statements for Two Months and Analysis

During the first month of operations ended July 31, Head Gear Inc. manufactured 27,000 hats, of which 25,700 were sold. Operating data for the month are summarized as follows:

Sales			$246,720
Manufacturing costs:
Direct materials	$148,500
Direct labor	37,800
Variable manufacturing cost	18,900
Fixed manufacturing cost	16,200		221,400
Selling and administrative expenses:
Variable	$12,850
Fixed	9,380		22,230

During August, Head Gear Inc. manufactured 24,400 designer hats and sold 25,700 hats. Operating data for August are summarized as follows:

Sales			$246,720
Manufacturing costs:
Direct materials	$134,200
Direct labor	34,160
Variable manufacturing cost	17,080
Fixed manufacturing cost	16,200		201,640
Selling and administrative expenses:
Variable	$12,850
Fixed	9,380		22,230

Required:

1a. Prepare an income statement for July using the absorption costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended July 31
		$
Cost of goods sold:
	$
		$
		$

1b. Prepare an income statement for August using the absorption costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Absorption Costing Income Statement
For the Month Ended August 31
		$
Cost of goods sold:
	$
		$
		$

2a. Prepare an income statement for July using the variable costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

2b. Prepare an income statement for August using the variable costing concept. Enter all amounts as positive numbers.

Head Gear Inc.
Variable Costing Income Statement
For the Month Ended August 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

3a. For July, income from operations reported under costing is less than costing due to part of manufacturing costs that are expensed.

3b. When large changes in inventory levels occur from one period to the next, it is possible for management to misinterpret such increases (or decreases) in income from operations as due to changes in:

costs.

prices.

sales volume.

"sales volume", "prices" and "costs" are correct.

None of these choices is correct.

The correct answer is:

4. Head Gear Inc. was under the variable costing concept. The difference in income reported under the absorption costing concept is due to allocating to the .

Salespersons' Report and Analysis

Walthman Industries Inc. employs seven salespersons to sell and distribute its product throughout the state. Data taken from reports received from the salespersons during the year ended December 31 are as follows:

Salesperson	Total Sales		Variable Cost of Goods Sold			Variable Selling Expenses
Case	$496,000		$267,840			$79,360
Dix	608,000		261,440			121,600
Johnson	498,000		234,060			64,740
LaFave	397,000		198,500			87,340
Orcas	471,000		249,630			65,940
Sussman	625,000		212,500			106,250
Willbond	505,000		262,600			90,900

Required:

1. Prepare a table indicating contribution margin, variable cost of goods sold as a percent of sales, variable selling expenses as a percent of sales, and contribution margin ratio by salesperson. Round percents to the nearest whole number. Enter all amounts as positive numbers.

Waltham Industries Inc.
Salespersons' Analysis
For the Year Ended December 31
Salesperson	Contribution Margin	Variable Cost of Goods Sold as a Percent of Sales	Variable Selling Expenses as a Percent of Sales	Contribution Margin Ratio
Case	$	%	%	%
Dix		%	%	%
Johnson		%	%	%
LaFave		%	%	%
Orcas		%	%	%
Sussman		%	%	%
Willbond		%	%	%

2. Which salesperson generated the highest contribution margin ratio for the year?

3. Identify the factors other than contribution margin that should be considered in evaluating the performance of salespersons.

Rate of growth in sales for the current year compared with past years

Years of experience for salespersons

Size of sales territory

Actual sales compared with budgeted sales

All of the above