1.
Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines.
1.
Explanation of Solution
Tactical decision making: Tactical decision making is a process in which the company can choose the correct alternative based on the profitability. In tactical decision making, offer price of a product is compared with the normal selling price and offer price less than the normal selling price of product is considered as the idle capacity for decision making.
Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines as follows:
Particulars | Corporate | Wedding | Special occasion | Total |
Revenues | $55,300 | $195,000 | $168,000 | $418,300 |
Less: Variable costs | $22,120 | $97,500 | $50,400 | $170,020 |
Contribution margin | $33,180 | $97,500 | $117,600 | $248,280 |
Less: Direct fixed expense: | ||||
Negotiating (1) | $8,000 | $24,000 | $8,000 | $40,000 |
Setting up (2) | $6,000 | $24,000 | $30,000 | $60,000 |
Product margin | $19,180 | $49,500 | $79,600 | $148,280 |
Less: Common fixed expense: | ||||
Operating expense | $75,000 | |||
Selling expense | $55,000 | |||
Operating income | $18,280 |
Table (1)
Product margin of three product line is less than the contribution margin and corporate line has least profit than other product line. Hence, person J should find the best product line to increase the overall profitability.
Note: Common fixed operating expense after total negotiation and setup cost is $75,000
Working note (1):
Calculate the negotiating cost for each product line.
Particulars | Corporate | Wedding | Special occasion | Total |
Negotiating hours (E) | 400 | 1,200 | 400 | 2,000 |
Total cost of negotiating (F) | $40,000 | $40,000 | $40,000 | $40,000 |
Negotiating cost | $8,000 | $24,000 | $8,000 | $40,000 |
Table (2)
Working note (2):
Calculate the setting up cost for each product line.
Particulars | Corporate | Wedding | Special occasion | Total |
Setting up hours (E) | 100 | 400 | 500 | 1,000 |
Total cost of negotiating (F) | $60,000 | $60,000 | $60,000 | $60,000 |
Negotiating cost | $6,000 | $24,000 | $30,000 | $60,000 |
Table (3)
2.
Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment.
2.
Explanation of Solution
Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment as follows:
Particulars | Corporate | Wedding | Special occasion | Total |
Revenues |
$41,475 (3) | $224,250 (4) | $184,800 (5) | $450,525 |
Less: Variable costs | $17,696 | $97,500 | $55,440 | $170,636 |
Contribution margin | $23,779 | $126,750 | $129,360 | $279,889 |
Less: Direct fixed expense: | ||||
Negotiating (1) | $8,000 | $24,000 | $8,000 | $40,000 |
Setting up (2) | $6,000 | $24,000 | $30,000 | $60,000 |
Product margin | $9,779 | $78,750 | $91,360 | $179,889 |
Less: Common fixed expense: | ||||
Operating expense | $75,000 | |||
Selling expense | $55,000 | |||
Operating income | $49,889 |
Table (4)
In this case, product marine of corporate line is less than the other two lines. If Person J does not expect the corporate event, then Person J should drop the corporate line and concentrate to increase the profitability of other two product lines.
Working note (3):
Calculate the new revenue for corporate line.
Working note (4):
Calculate the new revenue for wedding line.
Working note (5):
Calculate the new revenue for special occasion line.
Working note (6):
Calculate the new variable expense for corporate line.
Working note (7):
Calculate the new variable expense for special occasion line.
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Chapter 17 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Consider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firms controller. Leonard: Chuck, as you know, our firm has been losing market share over the past 3 years. We have been losing more and more bids, and I dont understand why. At first, I thought that other firms were undercutting simply to gain business, but after examining some of the public financial reports, I believe that they are making a reasonable rate of return. I am beginning to believe that our costs and costing methods are at fault. Chuck: I cant agree with that. We have good control over our costs. Like most firms in our industry, we use a normal job-costing system. I really dont see any significant waste in the plant. Leonard: After talking with some other managers at a recent industrial convention, Im not so sure that waste by itself is the issue. They talked about activity-based management, activity-based costing, and continuous improvement. They mentioned the use of something called activity drivers to assign overhead. They claimed that these new procedures can help to produce more efficiency in manufacturing, better control of overhead, and more accurate product costing. A big deal was made of eliminating activities that added no value. Maybe our bids are too high because these other firms have found ways to decrease their overhead costs and to increase the accuracy of their product costing. Chuck: I doubt it. For one thing, I dont see how we can increase product-costing accuracy. So many of our costs are indirect costs. Furthermore, everyone uses some measure of production activity to assign overhead costs. I imagine that what they are calling activity drivers is just some new buzzword for measures of production volume. Fads in costing come and go. I wouldnt worry about it. Ill bet that our problems with decreasing sales are temporary. You might recall that we experienced a similar problem about 12 years agoit was 2 years before it straightened out. Required: 1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard Bryner? Explain. 2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed? Explain your reasoning. 3. Do you think that Chuck was well informedthat he was aware of the accounting implications of ABC and that he knew what was meant by cost drivers? Should he have been well informed? Review (in Chapter 1) the first category of the Statement of Ethical Professional Practice for management accountants. Do any of these standards apply in Chucks case?arrow_forwardJames Henderson is the president of York Athletics, a producer of hats and jerseys and other accessories for fans of several professional sports teams. Imagine you are the accountant in charge of all accounting functions at Sportswear. She reviewed the most recent financial statements, and noticed that the company did not do as well as they had planned. She wanted to look more closely at the profitability of each of our products to determine exactly what happened, but realized that she did not have this information in the financial statements. According to the accountant, financial statements are prepared according to the Generally Accepted Accounting Principles (GAAP) and do not require their company to disclose profitability by product, and therefore did not prefer not to make this information public. Accordingly, product profitability information stays in-house and is prepared by the company’s managerial accountant. It is common among companies like York Athletics to prefer not to…arrow_forwardGeorge Costanza is an accountant for Vandelay Industries, a footwear and apparel company. The company's revenue and net income have increased by more than 100% over the past three years. During the same period, George and his colleagues in the Accounting Department have not received a raise or salary increase. Frustrated by not receiving a raise while the company has thrived, George has begun submitting expense reimbursements for personal purchases. George has a good relationship with his supervisor, and the supervisor simply "signs off" on George's expense reimbursements. George suspects that his supervisor knows that he is submitting personal expenses for reimbursement and is "looking the other way" because George has not received a raise in the past three years. Are George and his supervisor acting in an ethical manner? Why or why not?arrow_forward
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