Managerial Accounting
Managerial Accounting
15th Edition
ISBN: 9781337912020
Author: Carl Warren, Ph.d. Cma William B. Tayler
Publisher: South-Western College Pub
bartleby

Videos

Textbook Question
Chapter 14, Problem 2PA

Strategic initiatives and CSR

Get Hitched Inc. is a production company that is in the process of testing a strategic initiative aimed at increasing gross profit. The company’s current sales revenue is $1.5 million. Currently, the company’s gross profit is 35% of sales, but the company’s target gross profit percentage is 40%. The company’s current monthly cost of production is $975,000. Of this cost, 60% is for labor, 30% is for materials, and 10% is for overhead.

The strategic initiative being tested at Get Hitched is a redesign of its production process that splits the process into two sequential procedures. The makeup of the costs of production for Procedure 1 is currently 50% direct labor, 45% direct materials, and 5% overhead. The makeup of the costs of production for Procedure 2 is currently 55% direct labor, 25% direct materials, and 20% overhead. Company management estimates that Procedure 1 costs twice as much as Procedure 2.

Instructions

Determine what the cost of labor, materials, and overhead for both Procedures 1 and 2 would need to be for the company to meet its target gross profit at the current level of sales.

The company’s actual direct materials cost is $279,000 for Procedure 1. Determine the actual cost of direct labor, direct materials, and overhead for each procedure, and the total cost of production for each procedure.

The company is planning a CSR initiative to reuse some of the indirect materials used in production during Procedure 2. These indirect materials normally make up 60% of the overhead cost for Procedure 2, but the CSR initiative would reduce the usage of indirect materials. Determine what the maximum new cost of these indirect materials could be for Procedure 2 if this CSR initiative is expected to enable the company to meet its target gross profit percentage (holding all other costs constant).

a.

Expert Solution
Check Mark
To determine

Identify the cost of labor, material and overhead required by Company H to meet the target gross profit with the existing sales level for Procedure 1 and Procedure 2.

Explanation of Solution

Strategic Initiatives: Strategic initiatives refer to the process implemented by the organization to attain those goals which it aims at achieving in the given period or in a long run.

Compute the cost makeup for Procedure 1 and Procedure 2:

Target gross profit percentage – 40% of sales

Total cost of production percentage – 60% of sales

ParticularsAmount ($)
Total sales$1,500,000
Multiply: Total cost of production percentage(×)60%
Total cost of production$900,000

Table (1)

Total cost of production is $900,000.

Total cost of production = (Cost of Procedure 1(P1)+Cost of Procedure 2 (P2))Cost of Procedure 1(P1)= (Cost of Procedure 2 (P2))×2P1=2(P2)Total cost of production = 3(P2)

Compute the value of Cost of Procedure 2:

Total cost of production = 3(P2)$900,000=3(P2)(P2)=$900,0003(P2)=$300,000

Compute the value of Cost of Procedure 1:

Cost of Procedure 1(P1)= (Cost of Procedure 2 (P2))×2(P1)=2(P2)(P1)=$300,000×2(P1)=$600,000

Compute the Cost makeup of Procedure 1:

ParticularsAmount ($)
Labor (50%)$300,000
Materials (45%)$270,000
Overhead (5%)$30,000
Total cost of production$600,000

Table (2)

The Cost makeup of Procedure 1 is $600,000.

Compute the Cost makeup of Procedure 2:

ParticularsAmount ($)
Labor (55%)$165,000
Materials (25%)$75,000
Overhead (20%)$60,000
Total cost of production$300,000

Table (3)

The Cost makeup of Procedure 2 is $300,000.

b.

Expert Solution
Check Mark
To determine

Identify the cost of direct labor, direct material and overhead for Procedure 1 and Procedure 2.

Explanation of Solution

Compute the Material Cost of Procedure 1:

Material Cost of (P1)= 45% of Cost of (P1)Cost of (P1)=$279,00045%(P1)=$620,000

Compute the value of Cost of Procedure 2:

Material Cost of (P1) = 2(P2)(P2)=(P1)2(P2)=$620,0002(P2)=$310,000

Compute the Cost makeup of Procedure 1:

ParticularsAmount ($)
Labor (50%)$310,000
Materials (45%)$279,000
Overhead (5%)$31,000
Total cost of production$620,000

Table (4)

The Cost makeup of Procedure 1 is $620,000.

Compute the Cost makeup of Procedure 2:

ParticularsAmount ($)
Labor (55%)$170,500
Materials (25%)$77,500
Overhead (20%)$62,000
Total cost of production$310,000

Table (5)

The Cost makeup of Procedure 2 is $310,000.

c.

Expert Solution
Check Mark
To determine

Identify the maximum new cost for the indirect materials for Procedure 2.

Explanation of Solution

Compute the maximum new cost for the indirect materials for Procedure 2:

ParticularsAmount ($)
Current total cost of production$ 930,000
Less: Target total cost of production() ($ 900,000)
P2 materials cost savings needed$ 30,000
  
Current P2 overhead materials cost$ 37,200
Less: P2 overhead materials cost savings needed() ($ 30,000)
Maximum new cost of P2 overhead materials$ 7,200

Table (6)

The maximum new cost for the indirect materials for Procedure 2 is $ 7,200.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Strategic initiatives and CSR Quicksaw Inc. is a production company that is in the process of testing a strategic initiative aimed at increasing gross profit. The company’s current sales revenue is $1.5 million. Currently, the company’s gross profit is 35% of sales, but the company’s target gross profit percentage is 45%. The company’s current monthly cost of production is $975,000. Of this cost, 60% is for labor, 30% is for materials, and 10% is for overhead. The strategic initiative being tested at Quicksaw is a redesign of its production process that splits the process into two sequential procedures. The makeup of the costs of production for Procedure 1 is currently 50% direct labor, 45% direct materials, and 5% overhead. The makeup of the costs of production for Procedure 2 is currently 40% direct labor, 25% direct materials, and 35% overhead. Company management estimates that Procedure 1 costs twice as much as Procedure 2. Required: 1. Determine what the cost of labor, materials,…
Strategic initiatives and CSR Quicksaw Inc. is a production company that is in the process of testing a strategic initiative aimed at increasing gross profit. The company’s current sales revenue is $1,200,000. Currently, the company’s gross profit is 35% of sales, but the company’s target gross profit percentage is 40%. The company’s current monthly cost of production is $780,000. Of this cost, 50% is for labor, 20% is for materials, and 30% is for overhead. The strategic initiative being tested at Quicksaw is a redesign of its production process that splits the process into two sequential procedures. The makeup of the costs of production for Procedure 1 is currently 50% direct labor, 45% direct materials, and 5% overhead. The makeup of the costs of production for Procedure 2 is currently 50% direct labor, 20% direct materials, and 30% overhead. Company management estimates that Procedure 1 costs twice as much as Procedure 2. Required: 1. Determine what the cost of labor, materials,…
Just answer #3.  Strategic initiatives and CSR Quicksaw Inc. is a production company that is in the process of testing a strategic initiative aimed at increasing gross profit. The company’s current sales revenue is $1.5 million. Currently, the company’s gross profit is 35% of sales, but the company’s target gross profit percentage is 45%. The company’s current monthly cost of production is $975,000. Of this cost, 60% is for labor, 30% is for materials, and 10% is for overhead. The strategic initiative being tested at Quicksaw is a redesign of its production process that splits the process into two sequential procedures. The makeup of the costs of production for Procedure 1 is currently 50% direct labor, 45% direct materials, and 5% overhead. The makeup of the costs of production for Procedure 2 is currently 40% direct labor, 25% direct materials, and 35% overhead. Company management estimates that Procedure 1 costs twice as much as Procedure 2. Required: 1. Determine what the cost of…

Chapter 14 Solutions

Managerial Accounting

Ch. 14 - 72 Inc. has developed a balanced scorecard with...Ch. 14 - Bluetiful Inc. has the following strategic...Ch. 14 - Moses Moonrocks Inc. has developed a balanced...Ch. 14 - Prob. 4BECh. 14 - Lonnies Shipping Co. is considering switching to...Ch. 14 - Henrys Cafe is a local restaurant that is growing...Ch. 14 - American Express Company is a major financial...Ch. 14 - Eat-n-Run Inc. owns and operates 10 food trucks...Ch. 14 - Prob. 4ECh. 14 - Prob. 5ECh. 14 - The following is the balanced scorecard for Smith...Ch. 14 - Grand Grocery developed a balanced scored with six...Ch. 14 - Coulson and Company is a large retail business...Ch. 14 - Rizzo Goal Inc. produces and sells hockey...Ch. 14 - Silver Lining Inc. has a balanced scorecard with a...Ch. 14 - Two departments within Cougar Gear Inc. are...Ch. 14 - Sunny Nights Inc. is completely powered by the...Ch. 14 - Instructions 1. Label each element of the balanced...Ch. 14 - Strategic initiatives and CSR Get Hitched Inc. is...Ch. 14 - Prob. 3PACh. 14 - Instructions 1. Based on the balanced scorecard...Ch. 14 - Strategic initiatives and CSR Blue Skies Inc. is a...Ch. 14 - Eye Swear Inc. has a balanced scorecard that...Ch. 14 - Den-Tex Company is evaluating a proposal to...Ch. 14 - Analyze CSR initiatives at Boxwood Company Boxwood...Ch. 14 - Analyze CSR initiatives at Green Manufacturing...Ch. 14 - Prob. 1TIFCh. 14 - Blake McKenzie Tax Services is a company serving...Ch. 14 - Young Manufacturing Company is a startup...Ch. 14 - The fundamental concept behind strategic...Ch. 14 - Which of the following statements regarding the...Ch. 14 - The balanced scorecard provides an action plan for...Ch. 14 - Which of the following statements best describes...Ch. 14 - A sign of the successful implementation of a...
Knowledge Booster
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • Katayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions projected income statement for the coming year is as follows: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. 2. The divisional manager has decided to increase the advertising budget by 140,000 and cut the average selling price to 200. These actions will increase sales revenues by 1 million. Will this improve the divisions financial situation? Prepare a new income statement to support your answer. 3. Suppose sales revenues exceed the estimated amount on the income statement by 612,000. Without preparing a new income statement, determine by how much profits are underestimated. 4. How many units must be sold to earn an after-tax profit of 1.254 million? Assume a tax rate of 34 percent. (Round your answer up to the next whole unit.) 5. Compute the margin of safety in dollars based on the given income statement. 6. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?
    Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas expects sales of 15.9 million and cost of goods sold of 8.75 million. Advertising is a key part of Coral Seas business strategy, and total marketing expense for the year is budgeted at 2.8 million. Total administrative expenses are expected to be 675,000. Coral Seas has no interest expense. Income taxes are paid at the rate of 40 percent of operating income. Required: 1. Construct a budgeted income statement for Coral Seas Jewelry Company for the coming year. 2. What if Coral Seas had interest payments of 500,000 during the year? What effect would that have on operating income? On income before taxes? On net income?
    Cost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?
  • Macom Manufacturing has total contribution margin of $61,250 and net income of $24,500 for the month of June. Marcus expects sales volume to increase by 10% in July. What are the degree of operating leverage and the expected percent change in income for Macom Manufacturing? 0.4 and 10% 2.5 and 10% 2.5 and 25% 5.0 and 50%
    Company A has current sales of $10,000,000 and a 45% contribution margin. Its fixed costs are $3,000,000. Company B is a service firm with current service revenue of $5,000,000 and a 20% contribution margin. Company Bs fixed costs are $500,000. Compute the degree of operating leverage for both companies. Which company will benefit most from a 25% increase in sales? Explain why.
    Cost Classification, Income Statement Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateways work comes from contracts with city and state agencies in Nebraska. The companys sales volume averages 3 million, and profits vary between 0 and 10% of sales. Sales and profits have been somewhat below average for the past 3 years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids. Jack believes that Gateways current accounting system is deficient. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs of laying pipe, obtaining contracts, and administering the company. Yet all bids are based on the costs of laying pipe. With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of 165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own 114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters. Required: 1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day). 2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using equipment hours. What is the cost per equipment hour for these traceable costs?
  • Jakarta Company is a service firm with current service revenue of $400,000 and a 40% contribution margin. Its fixed costs are $80,000. Maldives Company has current sales of $6,610,000 and a 45% contribution margin. Its fixed costs are $1,800,000. What is the margin of safety for jaka rta and Maldives? Compare the margin of safety in dollars between the two companies. Which is stronger? Compare the margin of safety in percentage between the two companies. Now, which one is stronger? Compute the degree of operating leverage for both companies. Which company will benefit most from a 15% increase in sales? Explain why. Illustrate your findings in an Income Statement that is increased by 15%.
    Fire Company is a service firm with current service revenue of $900,000 and a 40% contribution margin. Its fixed costs are $200,000. Ice Company has current sales of $420,000 and a 30% contribution margin. Its fixed costs are $90,000. What is the margin of safety for Fire and Ice? Compare the margin of safety in dollars between the two companies. Which is stronger? Compare the margin of safety in percentage between the two companies. Now which one is stronger? Compute the degree of operating leverage for both companies. Which company will benefit most from a 10% increase in sales? Explain why. Illustrate your findings in an Income Statement that is increased by 10%.
    Caribbean Hammocks currently sells 75.000 units at $50 per unit. Its expenses are: Management believes it can increase sales by 5,000 units for every $5 decrease in sales price. It also believes the additional sales will allow a decrease in direct material of $1 for each additional 5,000 units. Prepare a flexible budgeted income statement for 75,000-, 80,000-, and 85,000-unit sales.
    • SEE MORE QUESTIONS
    Recommended textbooks for you
  • Managerial Accounting
    Accounting
    ISBN:9781337912020
    Author:Carl Warren, Ph.d. Cma William B. Tayler
    Publisher:South-Western College Pub
    Cornerstones of Cost Management (Cornerstones Ser...
    Accounting
    ISBN:9781305970663
    Author:Don R. Hansen, Maryanne M. Mowen
    Publisher:Cengage Learning
    Principles of Accounting Volume 2
    Accounting
    ISBN:9781947172609
    Author:OpenStax
    Publisher:OpenStax College
  • Managerial Accounting: The Cornerstone of Busines...
    Accounting
    ISBN:9781337115773
    Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
    Publisher:Cengage Learning
    EBK CFIN
    Finance
    ISBN:9781337671743
    Author:BESLEY
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Financial Accounting Intro Concepts Meth/Uses
    Finance
    ISBN:9781285595047
    Author:Weil
    Publisher:Cengage
  • Managerial Accounting
    Accounting
    ISBN:9781337912020
    Author:Carl Warren, Ph.d. Cma William B. Tayler
    Publisher:South-Western College Pub
    Cornerstones of Cost Management (Cornerstones Ser...
    Accounting
    ISBN:9781305970663
    Author:Don R. Hansen, Maryanne M. Mowen
    Publisher:Cengage Learning
    Principles of Accounting Volume 2
    Accounting
    ISBN:9781947172609
    Author:OpenStax
    Publisher:OpenStax College
    Managerial Accounting: The Cornerstone of Busines...
    Accounting
    ISBN:9781337115773
    Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
    Publisher:Cengage Learning
    EBK CFIN
    Finance
    ISBN:9781337671743
    Author:BESLEY
    Publisher:CENGAGE LEARNING - CONSIGNMENT
    Financial Accounting Intro Concepts Meth/Uses
    Finance
    ISBN:9781285595047
    Author:Weil
    Publisher:Cengage
    Why do we need accounting?; Author: EconClips;https://www.youtube.com/watch?v=weCXE2wIl90;License: Standard Youtube License