Established in 1963 in Datura, Italy, Datura, Ltd., is an international importer

Question

Established in 1963 in Datura, Italy, Datura, Ltd., is an international importer-exporter of pottery with distribution centers in the United States, Europe, and Australia. The company was very successful in its early years, but since then, its profitability has steadily declined. As a member of a management team, you will gather information for Datura’s next strategic planning meeting, and you have been asked to review its most recent contribution income statement, which appears below. Datura, Ltd. Contribution Income Statement For the Year Ended December 31, 2004 Sales Revenue € 13,500,000 Less Variable Cost Purchases € 6,000,000 Distribution 2,115,000 Sales Commissions 1,410,000 Total Variable Costs 9,525,000 Contribution Margin € 3,975,000 Less Fixed Cost Distribution € 985,000 Selling 1,184,000 General and Administrative 871,875 Total Fixed Cost 3,040,875 Operating Income € 934,000 In 2004, Datura sold 15,000 sets of pottery. Complete Part 1: 1. For each set of pottery sold in 2004, calculate the (a) selling price, (b) variable purchases cost, (c) variable distribution cost, (d) variable sales commission, and (e) contribution margin. 2. Calculate the breakeven point in units and in sales euros. 3. Historically, Datura’s variable costs have been about 60 percent of sales. What was the ratio of variable cost to sales in 2004? List three actions Datura could take to correct the difference. 4. How would fixed costs have been affected if Datura had sold only 14,000 sets of pottery in 2004?

Explanation / Answer

Datura Ltd Contribution Income statement for the year ended December 31,2004 In Euro Sales Revenue         1,35,00,000 Less : Variable cost - Purchases               60,00,000 - Distribution               21,15,000 - Sales commission               14,10,000            95,25,000 Contribution            39,75,000 Less : Fixed Cost - Distribution                 9,85,000 - Selling               11,84,000 - General & Admin                 8,71,875            30,40,875 Operating Income               9,34,125 Answer 1 Selling Price per set= Sales revenue / total sets sold = 13500000 / 15000 = $900 per set Variable purchase cost per set = variable purchase cost / total sets sold = 6000000 / 15000 = $400 per set Variable distribution cost per set = variable distribution cost / total sets sold = 2115000 / 15000 = $141 per set Variable sales commission cost per set = variable sales commission cost / total sets sold = 1410000 / 15000 = $94 per set Contribution margin per set = Total contribution margin / total sets sold = 3975000 / 15000 = $265 per set Answer 2 Break even point in units = Total fixed cost / Contribution margin per unit = 3040875 / 265 = 11475 sets Breakeven point in euro = 11475 sets * $900 per set = $1,03,27,500 Answer 3 Ratio of variable cost to sales = (Total Variable cost / sales revenue ) *100 = (9525000 / 13500000)*100 = 70.56% Three actions Datura could take to correct the difference is as under, 1) Increase the selling price per set 2) Decrease the variable purchase cost per set 3) Decrease the variable distribution and sales commission cost per set Answer 4 Fixed cost remain unaffected even if Datura sold only 14000 sets.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.