Chavez Company has two product lines-M and P. Line M had sales of £200,000 during October, a segment margin of 20%, and traceable fixed expenses of £30,000. The company as a whole had a contribution margin ratio of 30% and £135,000 in total contribution margin. Based on this information, total variable expenses for product P must have been
A)£130,000.
B)£155,000.
C)£185,000.
D)£315,000.

Question

Quizplus · Accepted Answer

First, we can calculate the total sales for the company by dividing the total contribution margin (£135,000) by the contribution margin ratio (30%):

Total sales = £135,000 ÷ 0.30 = £450,000

We can then calculate the sales for product P as:

Sales for P = Total sales - Sales for M = £450,000 - £200,000 = £250,000

Using the segment margin formula, we can calculate the total variable expenses for product M as:

Segment margin for M = Sales for M x Segment margin % - Traceable fixed expenses

£40,000 = £200,000 x 20% - £30,000

We can rearrange this formula to solve for total variable expenses for product M:

Total variable expenses for M = Sales for M x (100% - Segment margin %)

Total variable expenses for M = £200,000 x (100% - 20%) = £160,000

Now we can use the same formula to solve for the total variable expenses for product P:

Total variable expenses for P = Sales for P x (100% - Segment margin %)

Total variable expenses for P = £250,000 x (100% - 30%) = £175,000

Therefore, the answer is C, £185,000.

Chavez Company Has Two Product Lines-M and P