Explore BrainMass
Share

# Fixed Monthly Costs

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Group Mates: Holmes, Brenda Hulse, Thomas Johnson, April Kamposh, Faye Kostuch, Kristine laatsch, yvonne Lennox, Crystal

Details: The individual portion of this assignment is for each person to produce his/her own solution to the following. Claire's Antiques has fixed cost of \$75,000 per month. Each antique has the following identifiable sales price, variable material costs, and fixed monthly costs, respectively.

Sales Price Variable Material Costs Fixed Monthly Costs
Clocks \$700 \$320 20%
Dinette Sets \$3,700 \$1,280 35%
Bedroom Suites \$6,500 \$1,840 45%

When Claire's Antiques sells antiques through a distributor they pay a sales commission of 10% of the sales price. It sells 70% of each antique through its distributors. Assume that the fixed costs are allocated 20%, 35%, and 45% to the Clocks, Dinette Sets, and Bedroom Suites, respectively. Currently, the allocations are based on estimated design time for each antique.

Calculate the contribution margin for each antique. For purposes of this computation, ignore the sales commission as one of the variable cost.
Calculate the MONTHLY break-even units for each antique, once again, ignoring the variable cost for the sales commission.
This year, Claire's Antiques expects to sell 620 units of clocks, 180 units of dinette sets, and 110 units of bedroom suites, (70% through distributors as expected). Prepare a contribution margin income statement (with sales, each type of variable expense (material and sales commission), and fixed expenses) for Claire's Antiques based upon these sales volumes.
The distributors are now requesting a 15% commission on all antiques. Claire's Antiques does not want to change the selling prices of its antiques in order to absorb this increase. Compute by how much will it have to reduce other costs to make up for this request? What other counter-proposals could be suggested?
Claire's Antiques is facing fierce competition from a new company, and management decides to lower the selling price of the dinette sets by 10%. Also, they decide to acquire additional advertising at a cost of \$1,000 per month. This cost will be allocated only to the dinette sets. Recalculate their Break Even (for the dinette sets only) point given the new information. Ignore sales commissions completely.

Draw from what you are learning in this course and exercises, as well as your own business experience.

Claire's Antiques was ready to submit a sealed quote (bid) for a new customer who desired to purchase 150 clocks during the upcoming year. The sealed quote was for 150 clocks at \$650 each, for a total selling price of \$97,500. Claire's Antiques gained knowledge that its competitor was also placing a bid with this client. The competitors bid became known to have been for \$600 per clock. If Claire's Antiques loses this bid, its clock sales will decline, resulting in lower profits, and possibly the lay off of workers will take place. What possibilities would you suggest for Claire's Antiques? And what should the company do and why?

Objective: Describe the use of contribution margin analysis in product costing.
Use team and problem-solving skills to collaborate on a project.
Use effective communication techniques.
Use cost-volume-profit analysis to evaluate the financial consequences of alternative decisions.

#### Solution Preview

The response addresses the queries posted in 540 words with references.

//Before, we will talk about the use of contribution margin, we will have to firstly, understand the precise meaning of 'Contribution Margin'. So; initially, we will talk about the contribution margin under the heading of Introduction, for example: //

Introduction:

Contribution margin is the difference between sales value and marginal cost. It can also be defined as the excess of sales revenue over the variable cost. The difference between sales revenue and variable cost is considered to be the contribution towards fixed expenses and profit of the entire business. The concept of the contribution margin is based on the theory that the profit and fixed expenses of a business is a joint cost which cannot be equitably apportioned to different segments of the business.

//Above, we talked about the contribution margin, which is the difference between the amount of sales and marginal cost. As per directions, now we will discuss about the use of contribution margin. You are free to add more in this topic, which you find suitable. I am just providing you a brief overview.//

Use of Contribution Margin:

The contribution margin concept helps to determine the cost of a product to the management of the company. In the given course, the management of Antiques is determining their cost for clocks more than its competitor that can cause a reduction in overall customer base as well as decrease in the image of the company. The management can determine the price of its product equally to the total variable cost for the bid because the fixed coat of the company will be same for all the production level (Glautier & Underdown, 2001). This decision will also help to get the bid and increase in the total sales revenue of the company. The margin on the clock can be set at a lower amount in comparison of the normal sales.

//Above, we ...

#### Solution Summary

The response addresses the queries posted in 540 words with references.

\$2.19