Bolka Corporation, a merchandising company, reported the following results for October:
Sales
$ 418,000
Cost of goods sold (all variable)
$ 175,500
Total variable selling expense
$ 23,700
Total fixed selling expense
$ 21,800
Total variable administrative expense
$ 16,200
Total fixed administrative expense
$ 34,300
The contribution margin for October is:
Multiple Choice
A $202,600
B $361,900
C $146,500
The Correct Answer and Explanation is :
The contribution margin is calculated by subtracting total variable expenses (cost of goods sold, variable selling expense, and variable administrative expense) from sales. Fixed expenses are not considered in the calculation of contribution margin because they do not vary with sales volume.
Step-by-Step Calculation:
- Sales:
The total sales for October are given as $418,000. - Variable Costs:
- Cost of Goods Sold (COGS): $175,500
- Variable Selling Expense: $23,700
- Variable Administrative Expense: $16,200
- Total Variable Costs:
To find the total variable costs, we add together all variable costs: Total Variable Costs=COGS+Variable Selling Expense+Variable Administrative Expense\text{Total Variable Costs} = \text{COGS} + \text{Variable Selling Expense} + \text{Variable Administrative Expense} Total Variable Costs=175,500+23,700+16,200=215,400\text{Total Variable Costs} = 175,500 + 23,700 + 16,200 = 215,400 - Contribution Margin:
The contribution margin is calculated by subtracting the total variable costs from sales: Contribution Margin=Sales−Total Variable Costs\text{Contribution Margin} = \text{Sales} – \text{Total Variable Costs} Contribution Margin=418,000−215,400=202,600\text{Contribution Margin} = 418,000 – 215,400 = 202,600
Conclusion:
The contribution margin for October is $202,600, which corresponds to Option A.
Explanation:
The contribution margin is an important metric because it represents the amount of sales revenue available to cover fixed costs and then contribute to profit. By understanding the contribution margin, a company can assess its profitability and how changes in sales or costs impact its bottom line. For Bolka Corporation, the $202,600 contribution margin indicates how much of the $418,000 in sales revenue remains after covering variable costs, which can be used to cover fixed expenses and potentially generate profit.