Handbags R Us sells designer and everyday priced handbags

Question

Top management is deciding which product line to emphasize. Company accountants have provided the following data:

Designer
Per Item Everday
Per Item

Average Sales Price $250 $95
Average Variable Costs 100 25
Average Contribution Margin 150 70
Average Fixed Costs (allocated) 30 10
Average Operating Income $120 $60

The store has 5,000 square feet of floor space. If the company emphasizes everyday handbags, it can display 1,000 items in the store. If the store emphasizes designer handbags, it can display only 680 items, These numbers are also the average monthly sales in units.

Prepare an analysis to show which product the company should emphasize. Explain your answer. (Do not round intermediate answers.)
What will be an ideal response

Answer 1

Designer Everyday
Contribution margin per item $150 $70
Items per square foot of display space x 0.136 x 0.2
Total contribution margin per
square foot of display space 20.40 14.00

* 680 designer items / 5,000 square feet = 0.136 items per square foot
** 1,000 everyday items / 5,000 square feet = 0.2 items per square foot

The decision rule for constraints is to emphasize the product with the higher contribution margin per unit of the constraint. Handbags R Us should emphasize designer handbags because the contribution margin is $20.40 per square foot of display space, whereas the contribution margin for everyday handbags is only $14.00 per square foot of display space.