Effect of Change in Variable Cost, Fixed Cost and Sales Volume on
Contribution Margin and Profitability:
Learning Objectives:
- What is the effect of change in
variable cost, fixed cost and sales volume on contribution margin and
profitability?
The following data is used to
show the effect of changes in
variable cost,
fixed cost and sales volume on the
contribution margin and profitability.
Basic Data:
Selling price: $250 (100%)
Variable Expenses: $150 (60%)
Contribution Margin: $250 – $150 = $100 (40%)
Fixed Expenses: $35,000 per month
Suppose that a company is currently
selling 400 units per month. The sales manager would like to pay a sales
commission of $15 per unit sold rather than paying salespersons flat salaries that
now total $6,000 per month. The sales manager is confident that the change will
increase monthly sales by 15% to 460 units per month. Should the change be made?
Solution:
Changing the sales staff from a salaried basis to a commission basis will affect
both fixed and variable expenses. Fixed expenses will decrease by $6,000, from
$35,000 to 29,000. Variable expenses will increase by $15, from $150 to $165,
and the unit
contribution margin will decrease from $100 to $85.
|
Expected total contribution margin with sales staff on commission: |
|
| 460Units × $100 Per unit |
$39,100 |
| Present total contribution margin: |
|
| 400 units × $100 per unit |
40,000 |
| |
-------- |
| Decrease in total contribution margin |
$(900) |
|
Change in fixed expenses: |
|
| Add salaries avoided if a commission is paid |
6,000 |
| |
-------- |
| Increase in net operating income |
$5,100 |
| |
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According to this analysis, the change should be made.
Again, the same answer can be obtained by preparing comparative income
statements.
|
Present 400 units per month |
Expected 460 units per month |
Difference:
increase (decrease) in net operating income |
|
Total |
Per unit |
Total |
Per unit |
|
| Sales |
$100,000 |
$250 |
$115,000 |
$250 |
$15,000 |
| Less variable expenses |
60,000 |
150 |
75,900 |
165 |
(15,900) |
| |
------ |
------ |
------- |
------- |
-------- |
| Contribution margin |
$40,000 |
$100 |
$39,100 |
$85 |
$(900) |
| Less fixed expenses |
35,000 |
====== |
29,000 |
====== |
6,000 |
|
------- |
|
------- |
|
-------- |
| Net operating income |
$5,000 |
|
$10,1000 |
|
$5,100 |
|
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