Segments Metro Video Equipment Sales Video Rentals Dollars % Dollars % Dollars %
ID: 2373941 • Letter: S
Question
Segments
Metro Video Equipment Sales Video Rentals
Dollars % Dollars % Dollars %
Sales 560,000 100 280,000 100 280,000 100
Variable Cost (268,800) (48) (198,000) (71) (70,000) (25)
Contribution Margin 291,200 52 81,200 29 210,000 75
Fixed Cost Traceable
to Departments (67,200) (12) (25,200) (09) (42,000) 15
Departments
Responsibility Margin 224,000 24 56,000 20 168,000 60
Common Fixed Cost (61,600) (11)
Income From
Operations 162,400 29
On the basis of this information, compute the increase in monthly income from operations that may be expected to result from each of the following actions:
(a) Spending $5,000 per month in advertising is expected to increase sales in the Equipment Sales Department by 35%. $________________
(b) Closing the Equipment Sales Department and allowing the Video Rentals Department to expand is expected to increase the revenue of the Video Rentals Department by $105,000 per month. This action also is expected to increase fixed costs traceable to the Video Rentals Department by $40,000 per month. $_______________
Explanation / Answer
Case A. Spending $5000 increases sales by 35%==>
New Income=162400+ 35%*81200 - 5000=$185820
Therefore increase in monthly income=185820-162400=$23420
CaseB
Increase in monthly revenue=105000 and increase in costs=40,000 oppurtunity cost = 56000
==>Net increase in income=105000-40000-56000=$9000