Contribution Margin Percentage

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Complete Research & Application 5-34 page 207 of Managerial Accounting for Managers

Abstract

Complete Research & Application 5-34 page 207 of Managerial Accounting for Managers. The questions in this exercise are based on the Benetton Group, a company headquartered in Italy and known in the United States primarily for one of its brands of fashion apparel? United Colors of Benetton. To answer the questions, you will need to download the Benetton Group’s 2004 Annual Report at: http://media.corporate-ir.net/media_files/irol/11/114079/reports/2004ar.pdf

You do not need to print this document to answer the questions.

Benetton

1. How do the formats of the income statements shown on pages 33 and 50 of Benetton’s annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33?

Absorption is a method where all the costs of production are allocated to the produced units. This method is in contrast to variable (or marginal or direct) costing, which attaches only variable costs to the manufactured output and charges the fixed costs to the accounting period (referenceforbusiness.com, n.d.). The page 50 income statement uses the absorption format. The page 33 income statement is set using a contribution format. The contribution format centers on the idea that each unit sold provides a certain amount of contribution margin that goes to covering fixed costs.

In 2004 expenses like distribution and transport (29,988) and the sales commissions (73,573) have been reclassified (contribution format) as variable selling costs on page 33 ([104]).

2. Why do you think cost of sales is included in the computation of contribution margin on page 33?

Benetton’s cost of sales includes some fixed expenses but most of the expenses Benetton incurs are variable. The cost of sales is included in the computation of contribution margin because the costs that go into creating the products that Benetton sells have a direct relationship with the production of the products. Because the manufacturing of Benetton’s products is outsourced to many different suppliers the majority of expenses are variable.

3. Perform two separate computations of Benetton’s break-even point in Euros. For the first computation, use data from 2003. For the second computation, use data from 2004. Why do the numbers that you computed differ from one another?

| |2003 | |2004 | |General and administrative |464 | |436 | |expenses | | | | |Divide Contribution margin % |0.374 | |0.387 | |Breakeven |1240.64 | |1126.61 |

The numbers differ due to fixed expenses in 2004 are less than fixed expenses in 2003 and its contribution margin percentage in 2004 is larger than contribution margin percentage in 2003.

4. What sales volume would have been necessary in 2004 for Benetton to attain a target income from operations of €300 million?

| |2004 | |Target Income |300 | |General and administrative expenses |436 | |Total |736 | |Divide Contribution margin % |0.387 | |Sales to meet target profit |1901.81 |

5. Compute Benetton’s margin of safety using data from 2003 and 2004. Why do your answers for the two years differ from one another?

| |2003 |...
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