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ANSWER KEY 

Research and Application 5-34

1. The income statement on page 50 is prepared using anabsorption format. The income statement on page 33 isprepared using a contribution format. The annual reportsays that the contribution format income statementshown on page 33 is used for internal reporting purposes;nonetheless, Benetton has chosen to include it in theannual report. The contribution format income statementtreats all cost of sales as variable costs. The selling,general and administrative epenses shown on theabsorption income statement have been bro!en down intovariable and "ed components in the contribution formatincome statement.

#t appears the $istribution and Transport epenses and

the %ales &ommissions have been reclassi"ed as variableselling costs on the contribution format income statement.

 The sum of these two epenses according to theabsorption income statement on page 50 is '103,5(1 and'11),30* in +00) and +003, respectively. #f thesenumbers are rounded to the nearest thousand, they agreewith the variable selling costs shown in the contributionformat income statements on page 33.

+. The cost of sales is included in the computation of

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p

 The brea!even point in +00) is lower than in +003because Benettons "ed costs in +00) are lower than in+003 and its contribution margin ratio in +00) is higher

than in +003.

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Research and Application 5-34 continued2

). The target pro"t calculation is as follows

in millions; "gures are rounded2   2004 Total "ed costs 7 target pro"t......... '3(&ontribution margin ratio.................. 4 0.36%ales needed to achieve targetpro"t.................................................

'1,*0+

5. The margin of safety calculations are as follows

in millions; "gures arerounded2

2003 2004

8ctual sales............................ '1,65*

'1,(6(

Brea!even sales..................... 1,+)1 1,1+9argin of safety..................... '(16 '55*

 The margin of safety has declined because the drop insales from +003 to +00) '132 eceeds the decrease inbrea!even sales from +003 to +00) '11)2.

(. The degree of operating leverage is calculated as follows

in millions; "gures are rounded2   2004

&ontribution margin............................ '(53#ncome from operations...................... 4 '+1$egree of operating leverage d d2

3

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operations, the computation could be performed asfollows

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Research and Application 5-34 continued2

in millions; "gures are rounded2   20048ctual sales.................................................... '+1@ercentage increase in income fromoperations......................................................

1.16

@ro/ected income from operations.................. '+5(

. The income from operations in the "rst scenario would becomputed as follows

in millions; "gures are rounded2   2004%ales 1,(6( < 1.032................................. '1,3

&ontribution margin ratio.......................... 0.36&ontribution margin.................................. (+=ied general and administrative

epenses..................................................

 ))(

#ncome from operations............................ '++(

 The second scenario is more complicated becausestudents need to brea! the variable selling costs into itstwo componentsA$istribution and Transport and %ales&ommissions. sing the absorption income statement onpage 50, students can determine that %ales &ommissions

are about ).): of sales '3,53 4 '1,(6(,3512. #f %ales&ommissions are raised to (:, this is a 1.(: increase inthe rate. This 1.(: should be deducted from the

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Research and Application 5-34 continued2

6. The income from operations using the revised product mi is calculated as follows the

contribution margin ratios for each sector are given on pages 3( and 3 of the annualreport2

in millions2Casu

al

Sportswear &

Equipment Manufacturin

g & Other Total%ales........................... '1,55

)')5 '6 '1,(6(.

0&9 ratio...................... 0.)16 0.+06 0.06* D0.3*5

&9.............................. ' ()*.(

' *.) ' . (((.

=ied costs.................. )3(.0#ncome from

operations.................' +30.

D3*.5: is the weighted average contribution margin ratio. Eotice, it is higher than the36.: shown on page 33 of the annual report.

 The income from operations is higher under this scenario because the product mi has

shifted towards the sector with the highest contribution margin ratioAthe &asual sector.