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Problem 6-26

Contribution Format Income Statement

Total Wheat
Cereal

Sales 600,000 200,000


Variable Expenses
Mat., labor & other 204,000 60,000
Sales Commission 60,000 20,000
Total Variable Expenses 264,000 80,000
Contribution Margin 336,000 120,000
Traceable Fixed Expenses
Advertising 123,000 48,000
Salaries 66,000 34,000
Equipment Dep 30,000 12000
Warehouse Rent 12000 4000
Total Traceable Fixed Expenses 231,000 98,000
105,000 22,000
Common Fixed Expenses
General Administrative 90,000
Net Operating Income 15,000

Contribution Margin Ratio 0.56 0.6

part 2 ~ (a)

According to me company should not eliminate the Wheat Cereal as general admin
are 90,000 in total and Wheat Cereal revenues are equally contributing in covering
have to be covered by rest of two departments which would lower their net ope

part 2 ~ (b)
Company should not devote all of its resources to the PanCake Mix as it is clear from
respect to the other two segments which have higher of this ratio than the PanCake
to all of three segm
come Statement

PanCakeFloor
Mix

300,000 100,000

126,000 18,000
30,000 10,000
156,000 28,000
144,000 72,000

60,000 15,000
21,000 11,000
15000 3000
7000 1000
103,000 30,000
41,000 42,000

0.48 0.72

Wheat Cereal as general administrative expenses are common expenses for all of three segments of company which
equally contributing in covering up these expenses along with other segments, otherwise all of these expenses will
which would lower their net operating income two which in return will decrease the total NOI of the Compapny.

he PanCake Mix as it is clear from the above computation of CM Ratio that it is lower in the case of PanCake Mix with
er of this ratio than the PanCake Segment. So for smooth running of the business it is necessary to allocate resources
to all of three segments of the company.