On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children's Shoes because it reduced income from operations by $10,000.What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance?Foremost Footwear Inc.Product-Line Income StatementFor the Year Ended April 30, 20Y7Children'sMen'sWomen'sTotalShoesShoesShoesSales$165,000$300,000$500,000$965,000Costs of goods sold:Variable costs$105,000$150,000$220,000$475,000Fixed costs32,00060,000120,000212,000Total cost of goods$137,000$210,000$340,000$687,000soldGross profit$28,000$90,000$160,000$278,000Selling and adminstrative expenses:Variable selling and$21,000$45,000$95,000$161,000admin. expensesFixed selling and17,00020,00025,00062,000admin. expensesTotal selling and$38,000$65,000$120,000$223,000admin. expensesIncome (loss) from$(10,000)$25,000$40,00055,000 Foremost Footwear Inc.Product-Line Income StatementFor the Year Ended April 30, 20Y7Children'sMen'sWomen'sTotalShoesShoesShoesSales$165,000$300,000$500,000$965,000Costs of goods sold:Variable costs$105,000$150,000$220,000$475,000Fixed costs32,00060,000120,000212,000Total cost of goods$137,000$210,000$340,000$687,000soldGross profit$28,000$90,000$160,000$278,000Selling and adminstrative expenses:Variable selling and$21,000$45,000$95,000$161,000admin. expensesFixed selling and17,00020,00025,00062,000admin. expensesTotal selling and$38,000$65,000$120,000$223,000admin. expensesIncome (loss) from$(10,000)$25,000$40,00055,000operationsIf the Children Shoe's are discontinued, the company's income- v would decreaseV by s

If Children's Shoes are discontinued, there will be no variable cost because there would be no…

Answered: On the basis of the following data, the…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 6E

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At the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.
On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? Foremost Footwear Inc.Product-Line Income StatementFor the Year Ended April 30, 20Y7 Children's Shoes Men's Shoes Women's Shoes Total Sales $165,000 $300,000 $500,000 $965,000 Costs of goods sold: Variable costs $105,000 $150,000 $220,000 $475,000 Fixed costs 32,000 60,000 120,000 212,000 Total cost of goods sold $137,000 $210,000 $340,000 $687,000 Gross profit $28,000 $90,000 $160,000 $278,000 Selling and adminstrative expenses: Variable selling and admin. expenses $21,000 $45,000 $95,000 $161,000 Fixed selling and admin. expenses 17,000 20,000 25,000 62,000 Total selling and admin. expenses $38,000 $65,000 $120,000 $223,000 Income (loss) from…
Decision to Discontinue a Product On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? Foremost Footwear Inc. Product-Line Income Statement For The Year Ended April 30, 20Y7 Children's Shoes Men's Shoes Women's Shoes Total Sales $165,000 $300,000 $500,000 $965,000 Costs of goods sold: _______________ ___________ __________ ____________ Variable cost $105,000 $150,000 $220,000 $475,000 Fixed costs 32,000 60,000 120,000 212,000 Total cost of goods sold $137,000 $210,000 $340,000 $687,000 Gross profit $28,000 $90,000 $160,000 $278,000 Selling and adminstrative expenses: ____________ ____________ ____________ ___________ Variable selling and admin. expenses $21,000 $45,000 $95,000 $161,000 Fixed selling and admin.…
ecision to Discontinue a Product On the basis of the following data, the general manager of Foremost Footwear Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $10,000. What is the flaw in this decision if it is assumed that fixed costs would not be materially affected by the discontinuance? Foremost Footwear Inc.Product-Line Income StatementFor the Year Ended April 30, 20Y7 Children's Shoes Men's Shoes Women's Shoes Total Sales $165,000 $300,000 $500,000 $965,000 Costs of goods sold: Variable costs $105,000 $150,000 $220,000 $475,000 Fixed costs 32,000 60,000 120,000 212,000 Total cost of goods sold $137,000 $210,000 $340,000 $687,000 Gross profit $28,000 $90,000 $160,000 $278,000 Selling and adminstrative expenses: Variable selling and admin. expenses $21,000 $45,000 $95,000 $161,000 Fixed selling and admin. expenses 17,000 20,000 25,000 62,000 Total selling and admin. expenses $38,000 $65,000 $120,000…
On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Children’s Shoes because it reduced operating income by $30,000. Hawkeye Shoes Inc.Product-Line Income StatementFor the Year Ended November 30, 20Y8 Children's Shoes Men's Shoes Women's Shoes Total Sales $280,000 300,000 $500,000 $1,080,000 Costs of goods sold: Variable costs $(135,000) $(150,000) $(220,000) $(505,000) Fixed costs (45,000) (60,000) (120,000) (225,000) Total cost of goods sold $(180,000) $(210,000) $(340,000) $(730,000) Gross profit $100,000 $90,000 $160,000 $350,000 Selling and administrative expenses: Variable selling and admin. expenses $(100,000) $(45,000) $(95,000) $(240,000) Fixed selling and admin. expenses (30,000) (20,000) (25,000) (75,000) Total selling and admin. expenses $(130,000) $(65,000) $(120,000) $(315,000) Operating income (loss) $(30,000) $25,000 $40,000 $35,000 a.…
Lambert, Inc. manufactures several types of accessories. For the year, the knit hats and scarves line had sales of $400,000, variable expenses of $310,000, and fixed expenses of $120,000. Therefore, the knit hats and scarves line had a net loss of $30,000. If Lambert eliminates the knit hats and scarves line, $20,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the knit hats and scarves line.
Decision to Discontinue a Product On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children's Shoes because it reduced income from operations by $17,000. Featherweight Shoes Inc.Product-Line Income StatementFor the Year Ended April 30, 20Y8 Children's Shoes Men's Shoes Women's Shoes Total Sales $235,000 $300,000 $500,000 $1,035,000 Costs of goods sold: Variable costs $130,000 $150,000 $220,000 $500,000 Fixed costs 41,000 60,000 120,000 221,000 Total cost of goods sold $171,000 $210,000 $340,000 $721,000 Gross profit $64,000 $90,000 $160,000 $314,000 Selling and administrative expenses: Variable selling and admin. expenses $46,000 $45,000 $95,000 $186,000 Fixed selling and admin. expenses 35,000 20,000 25,000 80,000 Total selling and admin. expenses $81,000 $65,000 $120,000 $266,000 Income (Loss) from operations $(17,000) $25,000 $40,000 $48,000 a. Prepare a differential…
Lisah, Inc., manufactures golf clubs in three models. For the year, the Big Bart line has a net loss of $10,000 from sales $200,000, variable costs $180,000, and fi xed costs $30,000. If the Big Bart line is eliminated, $20,000 of fi xed costs will remain. Prepare an analysis showing whether the Big Bart line should be eliminated.
On the basis of the following data, the general manager of Featherweight Shoes Inc. decided to discontinue Children’s Shoes because it reduced income from operations by $17,000. Labels Cash flows from investing activities Costs Amount Descriptions Fixed costs Gain on sale of investments Income (loss) Loss on sale of investments Revenues Total costs Variable cost of goods sold Variable selling and administrative expenses
Making decisions about dropping a product Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018: Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed selling and administrative expenses by $15,000. Requirements Prepare a differential analysis to show whether Security Team should drop the industrial systems product line. Prepare contribution margin income statements to show Security Team’s total operating income under the two alternatives: (a) with the industrial systems line and without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement l. What have you learned from this comparison in Requirement 2?
Suppose Grainy Day is considering discontinuing its tasty loops product line. Assume that during the past year, the tasty loops' product line income statement showed the following: A B 1 Sales revenue $7,550,000 2 Less: Cost of goods sold 6,400,000 3 Gross profit 1,150,000 4 Less: Operating expenses 1,650,000 5 Operating income (loss) $(500,000) Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the tasty loops line is just one of the company's cereal operations, only $780,000 of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by the company. If the company decides to discontinue the product line, what will happen to the company's operating income? Should Grainy Day discontinue the tasty loops product line?
Bovine Company, a wholesale distributor of DVDs, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement below:Sales $1,500,000 Variable expenses 588,000 Contribution margin 912,000 Fixed expenses 945,000 Net operating loss $ (33,000)In an effort to isolate the problem, the president has asked for an income statement segmented by geographic market. Accordingly, the Accounting Department has developed the following data:Geographic Market South Central North Sales $400,000 $600,000 $500,000 Variable expenses as a percentage of sales 52% 30% 40% Traceable fixed expenses $240,000 $330,000 $200,000Required: i. Prepare a contribution format income statement segmented by geographic market, as desired by the president. ii. The company’s sales manager believes that sales in the Central geographic market could be increased by 15% if monthly advertising were increased by $25,000. Would you recommend the increased advertising? Show…

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