A contribution format income statement for the most recent year for Big Bear Con
ID: 462862 • Letter: A
Question
A contribution format income statement for the most recent year for Big Bear Consumer Electronics Inc. is shown below.
Total Department
AM/FM radios
HD radios
Sales
$320,000
100%
$270,000
100%
$50,000
100%
Less variable expenses
236,000
74%
216,000
80%
20,000
40%
Contribution Margin
84,000
26%
54,000
20%
30,000
60%
Less Traceable Fixed Expenses
15,000
5%
10,000
4%
5,000
10%
Segment Margin
69,000
22%
$44,000
16%
$25,000
50%
Less Common Fixed Expenses
40,000
13%
Net Operating Income
$29,000
9%
PROBLEM BACKGROUND:
Shortly after graduating with a business degree from Bridgewater State University, you are hired as an assistant to the District Manager of a national consumer electronics chain.
During your first day on the job, you attend a meeting regarding product lines carried by the chain. You learn about a fairly new innovation called HD (high definition) radio. This product allows consumers to listen to not only traditional AM and FM bands, but also to the newly created HD frequencies that most local radio stations are broadcasting free of charge to listeners on adjacent frequencies that previously were unused. Unlike satellite radio, this service requires no subscription charges. Consumers who have heard HD radio tell you that AM-HD broadcasts sound like FM and FM-HD broadcasts sound like CD quality!
Due to improved manufacturing technologies, the cost to manufacture HD radios has dropped dramatically.
PROBLEM:
Your boss (the District Manager) has authorized you to spend $10,000 for advertising for one of your chain’s local stores, promoting one of their product lines. A Marketing Research class at Bridgewater State University conducted a study indicating that the additional advertising would increase sales of the AM/FM radios by $50,000 and increase sales of the HD radios by only $45,000.
The local store manager (who never took a course in Managerial Accounting) argues that the advertising budget should be spent on the AM/FM radios because it will result in more sales dollars. The store manager also argues that the AM/FM radio line’s total sales are substantially higher than the HD line, therefore as the biggest selling item, it should receive all advertising allotments.
a) Determine which product line (AM/FM radios or HD radios) you will spend the $10,000 of advertising on. Show your work, justifying this decision, based upon a cost/benefit analysis. What would you tell the store manager? Include a short memo to your boss (the District Manager) explaining your decision.
Total Department
AM/FM radios
HD radios
Sales
$320,000
100%
$270,000
100%
$50,000
100%
Less variable expenses
236,000
74%
216,000
80%
20,000
40%
Contribution Margin
84,000
26%
54,000
20%
30,000
60%
Less Traceable Fixed Expenses
15,000
5%
10,000
4%
5,000
10%
Segment Margin
69,000
22%
$44,000
16%
$25,000
50%
Less Common Fixed Expenses
40,000
13%
Net Operating Income
$29,000
9%
Explanation / Answer
I will spend $10,000 on advertising on AM/FM as the Contribution Margin and Net income percentage is more than second option.
Spend on AM/FM Total Department AM/FM radios HD radios Sales 370,000 100% 320,000 100% 50,000 100% Less variable expenses 236,000 64% 216,000 68% 20,000 40% Contribution Margin 134,000 36% 104,000 33% 30,000 60% Less Traceable Fixed Expenses 25,000 7% 20,000 6% 5,000 10% Segment Margin 109,000 29% 84,000 26% 25,000 50% Less Common Fixed Expenses 40,000 11% Net Operating Income 69,000 19% Spend on HD Radios Total Department AM/FM radios HD radios Sales 365,000 100% 270,000 100% 95,000 100% Less variable expenses 236,000 65% 216,000 80% 20,000 21% Contribution Margin 129,000 35% 54,000 20% 75,000 79% Less Traceable Fixed Expenses 25,000 7% 10,000 4% 15,000 16% Segment Margin 104,000 28% 44,000 16% 60,000 63% Less Common Fixed Expenses 40,000 11% Net Operating Income 64,000 18%Related Questions
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