ASIGNMENT # 1

Management Accounting
Decision Making
Name :

Daood Abdullah
Yasir Ashraf
Azman Yousuf
Umer Khan Burki

14209003
14209002
14209005
13124003

Submitted To:
Sir Naveed
Ahmed Mughal

School of Accounting and Finance

Gujranwala

1. The income statement on page 50 is prepared using an absorption

costing method and format. The income statement on page 33 is

prepared using a contribution margin format. The annual report
says that the contribution margin format income statement shown
on page 33 is used for internal reporting purposes as , Benetton has
chosen to include it in the annual report. The contribution margin
format income statement treats all cost of sales as variable costs.
The selling, general and administrative expenses shown on the
absorption income statement are divided into variable and fixed
costs in contribution margin format statement on page 33.
While the Distribution and Transport expenses and the Sales
Commissions have been reappear as variable selling costs on the
contribution format income statement. The sum of these two
expenses according to the absorption income statement on page 50
is 103,561 and 114,309 in 2004 and 2003, respectively.
2. The cost of sales is included in the computation of contribution
margin because the Benetton Group primarily designs, markets, and
sells apparel. The manufacturing of the products is sold to various
suppliers. While Benettons cost of sales may include some fixed
costs, but the majority of the costs are variable, thus the cost of
sales is included in the calculation of contribution margin.
3. The break-even computations are as follows (see page 33 of annual
report):
(in millions)
Total fixed costs...............................
Contribution margin ratio................
Breakeven ......................................

2003
464
0.374
1,241

2004
436
0.387
1,127

The break-even point in 2004 is lower than in 2003 because

Benettons fixed costs in 2004 are lower than in 2003 and its
contribution margin ratio in 2004 is higher than in 2003.

4. The target profit calculation is as follows:

(in millions )
Total fixed costs + target profit...................
Contribution margin ratio............................
Sales needed to achieve target profit.........

2004
736
0.387
1,902

5. The margin of safety calculations are as follows:

(in millions)
Actual sales....................................
Breakeven sales.............................

2003
1,859
1,241

2004
1,686
1,127

Margin of safety.............................

618

559

The margin of safety has declined because the declining sales from
2003 to 2004 (173) increse the decrease in breakeven sales from
2003 to 2004 (114).
6. The degree of operating leverage is calculated as follows:
(in millions)
Contribution margin......................................
Income from operations................................
Degree of operating leverage (rounded).......

2004
653
217
3

A 6% increase in sales would result in income from operations of:

(in millions)
Revised sales (1,686 1.06)............................
Contribution margin ratio...................................
Contribution margin...........................................
Fixed general and administrative expenses.......
Income from operations.....................................

2004
1,787
0.387
692
436
256

The degree of operating leverage can be used to quickly determine

that a 6% increase in sales translates into an 18% increase in
income from operations (6% 3 = 18%). Rather than preparing a
revised contribution format income statement to ascertain the new
income from operations, the computation could be performed as
follows:
(in millions)
Actual sales................................................................
Percentage increase in income from operations.........
Projected income from operations..............................

2004
217
1.18
256

7. The income from operations in the first scenario would be computed

as follows:
(in millions)
2004
Sales (1,686 1.03)............................................. 1,737
Contribution margin ratio.....................................
0.387
Contribution margin.............................................
672
Fixed general and administrative expenses.........
446
Income from operations.......................................
226
Sales Commissions are about 4.4% of sales (73,573 1,686,351).
If Sales Commissions are raised to 6%, this is a 1.6% increase in the
rate. This 1.6% should be deducted from the contribution margin
ratio as shown below:
(in millions)
2004
Sales (1,686 1.05)............................................. 1,770

Contribution margin ratio (0.387 0.016)...........

Contribution margin.............................................
Fixed general and administrative expenses.........
Income from operations.......................................

0.371
657
446
211

The first situation is desirable because its increase income from

operations by 9 million (226217), whereas the second situation
decreases income from operations by 6 million (217 211).

Management Accounting Decision Making

8. The income from operations of revised product mix is calculated as
follows (the contribution margin ratios for each sector are given on pages 36
and 37 of the annual report):
(in millions)
Casual
Sales................................. 1,554
CM ratio............................
0.418
CM..................................... 649.6
Fixed costs........................
Income from operations....

Sportswear &
Equipment
45
0.208
9.4

Manufacturing
& Other
87
0.089
7.7

Total
1,686.0
*0.395
666.7
436.0
230.7

*39.5% is the weighted average contribution margin ratio. Notice, it is

higher than the 38.7% shown on page 33 of the annual report.
The income from operations is higher under this situation because the
product mix has shifted towards the sector with the highest contribution
margin ratiothe Casual sector.

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Assignment 1

Management Accounting Decision Making

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Assignment 1