Answer to Question #288803 in Accounting for Joseph

Question

The Beach Comber is a takeout food store at a popular beach resort. Susan Sexton,

owner of the beach comber, is deciding how much refrigerator space to devote to four different

drinks. Pertinent data on these four drinks are as follows

Cola Lemonade Punch Natural

Orange

Juice

Selling price per case $18.00 $19.20 $26.40 $38.40

Variable cost per case $13.50 $15.20 $20.10 $43.20

Cases sold per foot of shelf space per day 25 24 4 5

Sexton has a maximum front shelf space of 12 feet to devote to the four drinks. She wants a

minimum of 1 foot and a maximum of 6 feet of front shelf space for each drink.

Required:

1) A Co-worker of Sexton recommends that she can maximize the shelf space devoted to

those drinks with the highest contribution margin per case. Evaluate this recommendation

2) What shelf space allocation for the four drinks would you recommend for the beach

comber? Show your calculations

Answer 1

1. Contribution Margin

This recommendation does not make sense.It fails to recognise that the company has limited shelf space and therefore want to maximise the contribution margin per foot of the shelf space

Sexton should aim to highest contribution margin per foot of front shelf space, so that the limit shelf space factor get considered.

2.Allocation of shelf space to each product

We cannot choose for 6 foot for "natural orange juice", because we have to devote maximum of 12 feet overall

Note: Allocation basis: