Question

Gwazda Men's Clothings revenues and cost data for 2020 are as follows:

Revenues 500000

Cost of Goods sold 225000

Gross Margin 275000

Operating Costs

Salaries Fixed 190000

sales commissions(9%of sales) 45000

depreciation 12000

store rent (4500permonth) 54000

othe operating costs 35000 336000

operating income(loss) (61000)

Mr. Gwazda, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes 20000 variable costs, which vary with sales volume and 15000 fixed costs.

A) compute the contribution margin of gwazda mens clothing. Determine the formula to caluclate the contribution margin then enter the amounts in the formula to compute the contribution margin

B)compute the contribution margin percentage. determine the formula to calculate the contribution margin percentage, then enter the amounts in the formula to compute the contribution margin percentage

C) Mr. Gwazda estimates that he can increase units sold, and increase revenues by 15% by incurring additional advertising costs of $8000. Calculate the impact of the additional advertising costs on operating income. determine the formula to solve for the amount then complete the formula.  

Answer 1

Answer

A) Contribution Margin = $210,000

Calculation

Variable Costs = Cost of Goods Sold+Sales Commission+Variable portion of other operating costs

= $225,000+$45,000+$20,000

= $290,000

Contribution Margin = Net Sales or Revenues from Operations-Total Variable Costs

= $500,000-$290,000

= $210,000

B) Contribution Margin Percentage = 42%

Calculation

Contribution Margin Percentage = [Contribution Margin/Net Sales or revenues]*100

= [$210,000/$500,000]*100

= 42%

C) Operating Profit = $23,500 [after incurring $8,000 additional advertising costs]

Calculation

Increase in operating income = change in contribution margin-additional advertising costs

= {($500,000*15%)*42%} - $8,000

= 31,500-$8,000

= $23,500

So,by additional operating cost(advertising) of $8,000 the company can be able to make a operating income of $23,500.[when sales too increase by 15%]