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topic 3 sol - 3-30 1 Contribution margin decision making...

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3-30 Contribution margin, decision making. 1. Revenues $500,000 Deduct variable costs: Cost of goods sold $200,000 Sales commissions 50,000 Other operating costs 40,000 290,000 Contribution margin $210,000 2. Contribution margin percentage = $500,000 $210,000 = 42% 3. Incremental revenue (20% × $500,000) = $100,000 Incremental contribution margin (42% × $100,000) $42,000 Incremental fixed costs (advertising) 10,000 Incremental operating income $32,000 If Mr. Schmidt spends $10,000 more on advertising, the operating income will increase by $32,000, converting an operating loss of $10,000 to an operating income of $22,000. Proof (Optional): Revenues (120% × $500,000) $600,000 Cost of goods sold (40% of sales) 240,000 Gross margin 360,000 Operating costs: Salaries and wages $150,000 Sales commissions (10% of sales) 60,000 Depreciation of equipment and fixtures 12,000 Store rent 48,000 Advertising 10,000 Other operating costs: Variable ( $500,000 $40,000 × $600,000) 48,000 Fixed 10,000 338,000 Operating income $ 22,000
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3-36 CVP analysis, income taxes. 1. Unit CM = $11.25 CMRatio = 45% (11.25 ÷ 25) x 20,000 = $225,000 - $135,000 FC = 90,000 x 60% = $54,000 after tax profit Revenues – Variable costs – Fixed costs = rate Tax 1 income net Target - Let X = Net income for 2005 20,000($25.00) – 20,000($13.75) – $135,000 = X 1 0.40 -
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