Question 1

Read through the information below and answer the questions that follow.

The Classic Coat Counter trades from a highly sought-after small kiosk at a large international airport. The manager is deciding how much display space to devote to three different coats. Sales and costs for the current month are shown below:

	Bergman	Hepburn	Kelly
Selling price per unit	164	150	180
Variable costs per unit	112	105	125
Average units sold per day	12	18	8
Average units sold per metre of display space per day	10	6	8
Number of days in month				30
Total fixed costs				30,000

From next month, after a re-allocation of display space, the Classic Coat Counter will have a maximum display space of 8 metres available for the three coats. The manager wants a minimum of one metre and a maximum of four metres display space for each coat.

a. Show the contribution margin per unit for each coat and the total revenue, total contribution, and total profit for the current month.

b. Assume that the all the unit sales and cost information above, and the mix of products and sales, will remain the same for next month.

i. Based on the proportion of products sold, what is the average contribution per unit for all three coats?

ii. How many of each coat needs to be sold next month to reach break-even?

c. A co-worker incorrectly suggests that the profit will be maximised if the maximum display space is devoted to the coat with the highest profit per unit. Using your knowledge of marginal costing, explain precisely how the maximum display space available should be allocated to maximise profitability.