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Q16E

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 1413

Short Answer

Moore Company sells both designer and moderately priced fashion accessories. Top management is deciding which product line to emphasize. Accountants have provided the following data:

Per Item

Designer Moderately Priced

Average sales price $185 $87

Average variable costs 105 22

Average contribution margin 80 65

Average fixed costs (allocated) 20 10

Average operating income $60 $55

The Moore Company store in Grand Junction, Colorado, has 14,000 square feet of floor space. If Moore Company emphasizes moderately priced goods, it can display 840 items in the store. If Moore Company emphasizes designer wear, it can display only 560 designer items. These numbers are also the average monthly sales in units.

Prepare an analysis to show which product the company should emphasize.

The company should emphasize on moderately priced productsfor profit maximization.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Management

In business terms, a management refers to an authority responsible for managing and controlling the activities of an entity and its human assets.A management has the authority to develop policies and strategies for abusiness entity and also drafts decisions.

Step 2: Preparation of an analysis

Particulars

Designer ($)

Moderately Priced ($)

Units displayed per square foot:

Designer

(560/14,000)=0.04

(840/14,000)=0.06

Contribution margin per unit

80

65

Contribution margin per square foot of display space

(80*0.04)=3.20

(65*0.06)=3.90

Capacity square foot of display space

14,000

14,000

Total contribution margin at capacity

(14,000*3.20)=44,800

(14,000*3.90)=54,600

The company should emphasize on moderately priced products because it will provide a higher contribution margin.

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