Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
16th Edition
ISBN: 9780134642468
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 11, Problem 11.47P
Dropping a product line, selling more tours. Nelson River Tours, a division of Old World Travel, offers two types of guided fishing tours, Beginner and Advanced. Operating income for each tour type in 2017 is as follows:
| Beginner | Advanced | |
| Revenues (1,000 × $900; 800 × $1,650) | $900,000 | $1,320,000 |
| Operating costs | ||
| Administrative salaries | 240,000 | 200,000 |
| Guide wages | 260,000 | 760,000 |
| Supplies | 100,000 | 200,000 |
| |
50,000 | 120,000 |
| Vehicle fuel | 60,000 | 48,000 |
| Allocated corporate overhead | 90,000 | 132,000 |
| Total operating costs | 800,000 | 1,460,000 |
| Operating income (loss) | $100,000 | $ (140,000) |
The equipment has a zero disposal value. Guide wages, supplies, and vehicle fuel are variable costs with respect to the number of tours. Administrative salaries are fixed costs with respect to the number of tours. Dennis Baldwin, Nelson River Tours’ president, is concerned about the losses incurred on the Advanced tours. He is considering dropping the Advanced tour and offering only the Beginner tour.
- 1. If the Advanced tours are discontinued, one administrative position could be eliminated, saving the company $100,000. Assuming no change in the sales of Beginner tours, what effect would dropping the Advanced tour have on the company’s operating income?
Required
- 2. Refer back to the original data. If Nelson River Tours drops the Advanced tours, Baldwin estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $100,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Baldwin drop the Advanced tour? Explain.
- 3. What additional factors should Baldwin consider before dropping the Advanced tours?
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Stretch Inc. sells both yoga pants and yoga mats. Manager for Stretch are concerned about their operating losses. They are considering dropping their yoga mat product line. Operating income by product line and in total is shown below. 1) Prepare a new operating income analysis assuming Stretch will only sell yoga pants. 2) Then explain why Stretch should drop or not drop the yoga mat product line based on your analysis. All fixed costs are allocated fixed costs.
Income Statement for year ended December 31, 2020
Sales Revenue Total $425,000 Yoga Pants $299,000 Yoga Mats $126,000
Variable Costs $221,000 Yoga Pants $136,000 Yoga Mats $ 85,000
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Fixed Costs:
Fixed Manufacturing Total $127,000 Yoga Pants $62,000 Yoga Mats $65,000
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Refer back to the original data. If Nelson River Tours drops the Advanced tours, Baldwin estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $100,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Baldwin drop the Advanced tour? Explain.
Top managers of Video Avenue are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to helo make this decision:
Total fixed costs will not change if the company stops selling DVDs.
Video Avenue
Income Statment
For the Year Ended December 31, 2018
Total Blue-ray DVE Discs
Net Sale Revenue $ 437,000 $ 308,000 $ 129,000
Variable Costs 250,000 154,000 96,000
Contribution Margin 187,000 154,000 33,000
Fixed Cost
Manufacturing 132,000 76,000 56,000
Selling and Administrative 65,000 51,000 14,000
Total Fixed Expenses 197,000 127,000 70,000
Operating Income(Loss)…
Chapter 11 Solutions
Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
Ch. 11 - Prob. 11.1QCh. 11 - Define relevant costs. Why are historical costs...Ch. 11 - All future costs are relevant. Do you agree? Why?Ch. 11 - Distinguish between quantitative and qualitative...Ch. 11 - Describe two potential problems that should be...Ch. 11 - Variable costs are always relevant, and fixed...Ch. 11 - A component part should be purchased whenever the...Ch. 11 - Prob. 11.8QCh. 11 - Managers should always buy inventory in quantities...Ch. 11 - Management should always maximize sales of the...
Ch. 11 - Prob. 11.11QCh. 11 - Cost written off as depreciation on equipment...Ch. 11 - Managers will always choose the alternative that...Ch. 11 - Prob. 11.14QCh. 11 - Prob. 11.15QCh. 11 - Qualitative and quantitative factors. Which of the...Ch. 11 - Special order, opportunity cost. Chade Corp. is...Ch. 11 - Prob. 11.18MCQCh. 11 - Keep or drop a business segment. Lees Corp. is...Ch. 11 - Relevant costs. Ace Cleaning Service is...Ch. 11 - Disposal of assets. Answer the following...Ch. 11 - Relevant and irrelevant costs. Answer the...Ch. 11 - Multiple choice. (CPA) Choose the best answer. 1....Ch. 11 - Special order, activity-based costing. (CMA,...Ch. 11 - Make versus buy, activity-based costing. The...Ch. 11 - Inventory decision, opportunity costs. Best Trim,...Ch. 11 - Relevant costs, contribution margin, product...Ch. 11 - Selection of most profitable product. Body Image,...Ch. 11 - Theory of constraints, throughput margin, relevant...Ch. 11 - Closing and opening stores. Sanchez Corporation...Ch. 11 - Prob. 11.31ECh. 11 - Relevance of equipment costs. Janets Bakery is...Ch. 11 - Equipment upgrade versus replacement. (A. Spero,...Ch. 11 - Special order, short-run pricing. Diamond...Ch. 11 - Short-run pricing, capacity constraints. Fashion...Ch. 11 - International outsourcing. Riverside Clippers Corp...Ch. 11 - Relevant costs, opportunity costs. Gavin Martin,...Ch. 11 - Opportunity costs and relevant costs. Jason Wu...Ch. 11 - Opportunity costs. (H. Schaefer, adapted) The Wild...Ch. 11 - Make or buy, unknown level of volume. (A....Ch. 11 - Make versus buy, activity-based costing,...Ch. 11 - Prob. 11.42PCh. 11 - Product mix, special order. (N. Melumad, adapted)...Ch. 11 - Theory of constraints, throughput margin, and...Ch. 11 - Theory of constraints, contribution margin,...Ch. 11 - Closing down divisions. Ainsley Corporation has...Ch. 11 - Dropping a product line, selling more tours....Ch. 11 - Prob. 11.48PCh. 11 - Dropping a customer, activity-based costing,...Ch. 11 - Equipment replacement decisions and performance...
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