Question

Analyzing profitability

Relative Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs

Sales Price \( 1,400 \) 50

Variable manufacturing costs 1,148 21

Sales commission (8%) 112 4

Relative Furniture has three sales representatives: Abe, Brett, and Corrin. Abe sold 50 tables with 4 chairs each. Brett sold 110 tables with 6 chairs each. Corrin sold 90 tables with 8 chairs each.

Requirements:

1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places).
2. Which sales representative has the highest contribution margin ratio? Explain why.

Short answer

1. The contribution margin of Abe, Brett, and Corrinis $12,716, $27,894 and $22,912.The contribution margin ratio ofAbe, Brett, and Corrin is 18.11% and 18.08%, and 18.13%respectively.
2. Abe sales representative has highest contribution margin ration because of appropriate sales-mix.
   

Step-by-step solution

Calculation of average service revenue per customer, average variable cost per customer, and, average contribution margin per customer (1). 

Particulars	Abe (50 tables and 4 Chairs)	Brett (110 tables and 6 Chairs)	Corrin (90 tables and 8 Chairs)
Sales price	($1,400x50+$50x4) =$70,200	($1,400x110+$50x6) =$154,300	($1,400x90+$50x8) =$126,400
Variable cost	($1,148x50+$21x4) =$57,484	($1,148x110+$21x6) =$126,406	($1,148x90+$21x8) =$103,488
Contribution Margin	$12,716	$27,894	$22,912
Contribution margin ratio (Contribution margin/Sales)	$12,716/$70,200 =18.11%	$27,894/$154,300 =18.08%	$22,912/$126,400 =18.13%

Reason forthe difference in the contribution margin ratio between sales representatives (2):

Abe has the highest contribution margin ratio because of the appropriate sales mix.