Problem:
Contribution margin, decision making. Lurvey Men's Clothing's revenues and cost data for 2011 are as follows:
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Revenues
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$600,000
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Cost of goods sold
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ƒ300,000
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Gross margin
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|
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300,000
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Operating costs:
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|
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Salaries fixed
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$170,000
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|
|
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Sales commissions (10% of sales)
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60,000
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|
|
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Depreciation of equipment and fixtures
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20,000
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|
|
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Store rent ($4,500 per month)
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54,000
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|
|
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Other operating costs
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45,000
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349,000
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|
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Operating income (loss)
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$(49,000)
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Mr. Lurvey, the owner of the store, is unhappy with the operating results. An analysis of other operating costs reveals that it includes $30,000 variable costs, which vary with sales volume, and $15,000 (fixed) costs.
1. Compute the contribution margin of Lurvey Men's Clothing.
2. Compute the contribution margin percentage.
3. Mr. Lurvey estimates that he can increase revenues by 15% by incurring additional advertising costs of $13,000. Calculate the impact of the additional advertising costs on operating income.