Pepper’s Automotive produces auto parts for various automotive retailers. Pepper’s is evaluating the exhaust system division of the company and has come up with the following data for the year: net revenues are $1,270,000, variable costs are $426,000, and fixed costs are $517,000. Of the fixed costs, controllable fixed costs are $118,000 and noncontrollable fixed costs are $399,000. Pepper’s Automotive has further analyzed the exhaust system division into three products: exhaust pipes, intake valves, and intake pipes. The income statement is available below. If intake valves were dropped, what would be the change in profits in the short run and the long run, respectively? Exhaust Pipes Intake Valves Intake Pipes Net revenues $ 590,000 $ 390,000 $ 290,000 Variable costs 59,000 195,000 172,000 Contribution margin 531,000 195,000 118,000 Controllable fixed costs 59,000 59,000 0 Controllable margin 472,000 136,000 118,000 Noncontrollable fixed costs 145,000 195,000 59,000 Contribution by profit center $ 327,000 $ (59,000 ) $ 59,000 multiple choice Short run: $136,000 decrease; long run: $59,000 increase Short run: $195,000 increase; long run: $59,000 decrease Short run: $136,000 increase; long run: $59,000 decrease Short run: $59,000 increase; long run: $136,000 decrease

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter5: Process Costing

Section: Chapter Questions

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Pepper’s Automotive produces auto parts for various automotive retailers. Pepper’s is evaluating the exhaust system division of the company and has come up with the following data for the year: net revenues are $1,270,000, variable costs are $426,000, and fixed costs are $517,000. Of the fixed costs, controllable fixed costs are $118,000 and noncontrollable fixed costs are $399,000.

Pepper’s Automotive has further analyzed the exhaust system division into three products: exhaust pipes, intake valves, and intake pipes. The income statement is available below.

If intake valves were dropped, what would be the change in profits in the short run and the long run, respectively?

	Exhaust Pipes		Intake Valves	Intake Pipes
Net revenues	$	590,000		$	390,000		$	290,000
Variable costs		59,000			195,000			172,000
Contribution margin		531,000			195,000			118,000
Controllable fixed costs		59,000			59,000			0
Controllable margin		472,000			136,000			118,000
Noncontrollable fixed costs		145,000			195,000			59,000
Contribution by profit center	$	327,000		$	(59,000	)	$	59,000