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 Topic: Becker chapter 5 question ( Topic Closed)
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cpakat
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| Posted: 24 Jun 2010 at 17:52 | IP Logged
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Condensed monthly operating income data for Korbin, Inc. for May 31, 1994, is presented below.
Korbin, Inc.
Combined Income Statement
May 31, 1994
Urban Suburban
Store Store Total
Sales $80,000 $120,000 $200,000
Variable costs 32,000 84,000 116,000
Contribution margin 48,000 36,000 84,000
Direct fixed-costs 20,000 40,000 60,000
Store segment margin 28,000 (4,000) 24,000
Common fixed-cost 4,000 6,000 10,000
Operating income $24,000 $ (10,000) $ 14,000
Additional information regarding Korbin's operations follows.
• One-fourth of each store's direct fixed costs would continue if either store were closed.
• Korbin allocates common fixed costs to each store on the basis of sales dollars.
• Management estimates that closing the Suburban Store would result in a ten percent decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.
• The operating results for May 1994 are representative of all months.
Korbin is considering a promotional campaign at the Suburban Store that would not affect the Urban Store. Increasing annual promotional expense at the Suburban Store by $60,000 in order to increase this store's sales by ten percent would result in a monthly increase (decrease) in Korbin's operating income during 1995 (rounded) of:
Choice "a" is correct. $(1,400).
10% increase in contribution margin:
$36,000 10% $ 3,600
Promotional expense for one month:
$60,000 annual expense 1/12 (5,000)
Decrease in operating income $(1,400)
Can somebody please explain why they added 10% to the contribution margin instead of sales.
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BRAF=CPA
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| Posted: 24 Jun 2010 at 19:09 | IP Logged
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Because when you add 10% to sales your also adding 10% to variable costs since VC's are production driven. And since contribution margin is Sales less VC then by increasing sales by 10% your also increasing the contribution margin by 10%.
By not doing that your saying that by increasing your sales volume there would be no increase in total variable costs to produce those products.
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BRAF=CPA
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| Posted: 24 Jun 2010 at 19:12 | IP Logged
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Also, i hate that problem. You must be using Becker MQC's.
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cpakat
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| Posted: 26 Jun 2010 at 02:20 | IP Logged
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Thanks! That makes a lot of sense,I stared at that question for 10 minutes not fully understanding why, I guess I was thinking that since I was already adding $5,000 of promotional expense then that was relative to the additional sales, plus the question is worded in a strange way. But it makes sense that variable costs would have to increase by the 10% as well since variable costs increase with additional sales.
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