Question - Contribution Margin Reporting and Analysis for Service Firms
Music for All Occasions is a service business that provides musical groups to play at parties, wedding receptions, etc. Customers can choose between a big swing-style band, a small jazz combo, or a rock band. The price customers must pay depends on the style of band they choose and the number of hours they want the band to perform.
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Big Band
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Jazz Combo
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Rock Band
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|
Number of Musicians
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15
|
4
|
5
|
|
Price per Hour
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$650
|
$185
|
$200
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The musicians in all groups are paid $20 per hour. The company employs one person who sets up the equipment needed by the bands before each job (or "gig") and dismantles the equipment at the end of the job. This person is paid $125 to set up and tear down each job. The company's yearly costs are $5,000 for advertising, $7,000 for equipment rental and depreciation, and $9,500 for other administrative costs.
During 2014, Music for All Occasions performed the following jobs:
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Big Band
|
Jazz Combo
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Rock Band
|
|
Number of Jobs
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32
|
97
|
88
|
|
Total Number of Hours for All Jobs
|
105
|
410
|
370
|
At the beginning of 2015, competition forced the owner of Music for All Occasions to change the price for the Big Band to $575 per hour and reduce the number of musicians in the group to 12. The wage rate for musicians in the Big Band was also raised to $25 per hour. Based on the former price of $650 per hour, the owner estimated the Big Band would perform 35 jobs in 2015 totaling 115 hours. However, with the reduced price, the Big Band actually played 50 jobs in 2015 for a total of 165 hours.
Perform the following analysis for Music for All Occasions:
1. Determine the cost behavior (fixed or variable) for all of the company's costs and identify the activity base for the variable costs.
2. Prepare a report showing contribution margin and contribution margin ratio by type of band for 2014.
3. Prepare a variable costing income statement for the entire company for 2014. Be sure your income statement shows both contribution margin and income from operations.
4. Prepare a contribution margin analysis report for only the Big Band for 2015 comparing planned performance under the old price structure ($650 per hour with 15 musicians) and the actual performance under the reduced price structure ($575 per hour with 12 musicians).