Benetton Case Study

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ANSWER KEY
Research and Application 5-34
1.The two methods are different because page 33 is using the contribution method and page 50 is using the absorption costing.

2.Because of the type of business the company does. The company uses a lot of variable costs and the cost of sales is included in calculating the contribution margin.

3.Because of the type of business the company does. The company uses a lot of variable costs and the cost of sales is included in calculating the contribution margin.

| 2003| 2004|
Total fixed costs| 464| 436|
Contribution margin ratio| ÷ 0.374| ÷ 0.387|
Breakeven in euros| 1,241| 1,127|

2004<2003
Fixed costs- 2004<2003
CM 2004>2003
Research and Application 5-34 (continued)
4.The target profit calculation is as follows:

(in millions; figures are rounded)| 2004|
Total fixed costs + target profit| €736|
Contribution margin ratio| ÷ 0.387|
Sales needed to achieve target profit| €1,902|

5.The margin of safety calculations are as follows:

(in millions; figures are rounded)| 2003| 2004|
Actual sales| €1,859| €1,686|
Breakeven sales| 1,241| 1,127|
Margin of safety| €618| €559|

The margin of safety has declined because the drop in sales from 2003 to 2004 (€173) exceeds the decrease in breakeven sales from 2003 to 2004 (€114).

6.The degree of operating leverage is calculated as follows:

(in millions; figures are rounded)| 2004|
Contribution margin| €653|
Income from operations| ÷ €217|
Degree of operating leverage (rounded)| 3|

A 6% increase in sales would result in income from operations of:

(in millions; figures are rounded)| 2004|
Revised sales (€1,686 ×1.06)| €1,787|
Contribution margin ratio| 0.387|
Contribution margin| 692|
Fixed general and administrative expenses|  436|
Income from operations| €256|

The degree of operating...
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