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Moore Company sells both designer and moderately priced fashion accessories. Top management is deciding which product line to emphasize. Accountants have provided the following data:

Per Item

Designer Moderately Priced

Average sales price \(185 \)87

Average variable costs 105 22

Average contribution margin 80 65

Average fixed costs (allocated) 20 10

Average operating income \(60 \)55

The Moore Company store in Grand Junction, Colorado, has 14,000 square feet of floor space. If Moore Company emphasizes moderately priced goods, it can display 840 items in the store. If Moore Company emphasizes designer wear, it can display only 560 designer items. These numbers are also the average monthly sales in units.

Prepare an analysis to show which product the company should emphasize.

Short Answer

Expert verified

The company should emphasize on moderately priced productsforprofit maximization.

Step by step solution

01

Meaning of Management

In business terms, a management refers to an authority responsible for managing and controlling theactivities of an entity and itshuman assets.A management has the authority to developpolicies and strategiesfor abusiness entity and also drafts decisions.

02

Preparation of an analysis

Particulars

Designer ($)

Moderately Priced ($)

Units displayed per square foot:

Designer

(560/14,000)=0.04

(840/14,000)=0.06

Contribution margin per unit

80

65

Contribution margin per square foot of display space

(80*0.04)=3.20

(65*0.06)=3.90

Capacity square foot of display space

14,000

14,000

Total contribution margin at capacity

(14,000*3.20)=44,800

(14,000*3.90)=54,600

The company should emphasize on moderately priced productsbecause it will provide a higher contribution margin.

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Most popular questions from this chapter

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Each morning, Max Smith stocks the drink case at Maxโ€™s Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.

Maxโ€™s Beach Hut sells three types of cold drinks:

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2. Licious-Ade in 20-oz. bottles for \)1.90 per bottle

3. Pep-Cola in 20-oz. bottles for \(2.20 per bottle

Maxโ€™s Beach Hut pays its suppliers:

1. \)0.20 per 12-oz. can of Licious-Ade

2. \(0.35 per 20-oz. bottle of Licious-Ade

3. \)0.55 per 20-oz. bottle of Pep-Cola

Maxโ€™s Beach Hutโ€™s monthly fixed costs include:

Hut rental \(355

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Maxโ€™s salary 1,700

Total fixed costs \)2,120

Maxโ€™s Beach Hut can sell all the drinks stocked in the display case each morning.

Requirements

1. What is Maxโ€™s Beach Hutโ€™s constraining factor? What should Max stock to maximize profits?

2. Suppose Maxโ€™s Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Maxโ€™s stock? How many units of each product will be available for sale each day?

Skiable Acres operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 10% return on investment on the companyโ€™s \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)31,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about \(8 per guest. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.

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