Week 1 Assignment Complete the following problems from the text

Week 1 Assignment
Complete the following problems from the text…
Chapter 2: Problem 2-50 – Comparing Contribution Margin Percentages
1. Compute the contribution-margin percentage of Microsoft and that of Procter & Gamble. Why do you suppose the percentages are so different?
2. Suppose each company increases its revenue by $10 million. Compute the increase in operating income for each company.
3. Explain how the contribution margin percentage helps you predict the effects on operating income of changes in sales volume. What assumptions do you make in forming such a prediction?

1. Microsoft: Contribution Margin Percentage
Given cost of revenue as the variable cost
Revenue =$60, 420
Less: VC =$11, 598
Contribution margin = 48, 822
Contribution Margin percentage =total contribution margin /total sales x100=$48,822/60,420×100
=80.80% which is contribution margin ration

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Procter & Gamble
Net: $83,503
Less: VC=$40,695
Contribution Margin=42,808
Contribution margin percentage =total contribution margin/total salesx100
42,808/83,503×100=51.26
Microsoft: Contribution margin ration is 51.26%

2. When increase in revenue of $10,000,000 the operating income will be:
Microsoft:
New revenue is
Old revenue +$10,000, 0000
$60,420+$10,000,000=$10, 060, 420
Revenue =$10,060, 420
Less: VC=$1,931,160
Research & Development =$8,164
Sales & Marketing = $13,039
General & Admn+$5,127
Operating income=$8,102,930
Increase in operating income $8,080,438 (8,102,930-$22,492)
Protector & Gamble
New revenue is
Old revenue +$10, 000,000
83,503+10,000,000=10,083, 503
Revenue =$10, 083,503
Less: VC =$4,914,170
Selling, general and Admn expenses =$25,725
Operating Income=$5,126,525 ($5,143,608-$17,083).

3. If sales volume will change variable cost will also change and hence contribution ratio will change in same ratio. Example: If total sales are (in units) 500 units @ $2 per unit and variable cost is $.50 per unit and other fixed costs are $500 then contribution margin ratio will be…
Sales=500x$2=$1000
Less : VC =500x$.50=250
Contributing margin=750
Less Income cost=$500
Operating Income=$250Contributing margin ratio is 750/1000×100=75%
This example shows fixed cost was 50% of the sale. Therefore, Operating income will be 75%-50%=25% of sales.

Chapter 5: Exercise 5-35 – Contribution Income Statement
5-35 Contribution Income Statement Spadoni Company had the following data (in thousands) for a given period. Assume there are no inventories.

Fixed indirect manufacturing cost=Total FC-Fixed selling and administrative expenses.
=140, 000-$105, 000
=$35, 000
Thus, the Company S has fixed indirect manufacturing cost of $35,000