Concept explainers
Shannon, Inc., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below:
On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the company’s vice president of finance.
MADGE: “The Party Supplies Division is killing us. It’s not even covering its own fixed costs. I’m beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasn’t done much better than the previous divisional manager.”
BOB: “Well, before you get too excited about the situation, perhaps you should evaluate Paula’s most recent proposals. She wants to spend $10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by $25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10 percent if the right advertising is done—and done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30 percent. The cost of the lease is $95,000 per quarter.”
Upon hearing this news, Madge calmed considerably and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confidence in Paula’s judgment and abilities.
Required:
- 1. Assuming that Paula’s proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division? Prepare a segmented income statement for the next quarter that reflects the implementation of Paula’s proposals. Assume that the Cookware Division’s sales increase by 5 percent for the next quarter and that the same cost relationships hold.
- 2. Suppose that everything materializes as Paula projected except for the 10 percent increase in sales—no change in sales revenues takes place. Are the proposals still sound? What if the variable costs are reduced by 40 percent instead of 30 percent with no change in sales?
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Chapter 18 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- 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.arrow_forwardPosavek is a wholesale supplier of building supplies building contractors, hardware stores, and home-improvement centers in the Boston metropolitan area. Over the years, Posavek has expanded its operations to serve customers across the nation and now employs over 200 people as technical representatives, buyers, warehouse workers, and sales and office staff. Most recently, Posavek has experienced fierce competition from the large online discount stores. In addition, the company is suffering from operational inefficiencies related to its archaic information system. Posavek revenue cycle procedures are described in the following paragraphs. Revenue Cycle Posaveks sales department representatives receive orders via traditional mail, e-mail, telephone, and the occasional walk-in customer. Because Posavek is a wholesaler, the vast majority of its business is conducted on a credit basis. The process begins in the sales department, where the sales clerk enters the customers order into the centralized computer sales order system. The computer and file server are housed in Posaveks small data processing department. If the customer has done business with Posavek in the past, his or her data are already on file. If the customer is a first-time buyer, however, the clerk creates a new record in the customer account file. The system then creates a record of the transaction in the open sales order file. When the order is entered, an electronic copy of it is sent to the customers e-mail address as confirmation. A clerk in the warehouse department periodically reviews the open sales order file from a terminal and prints two copies of a stock release document for each new sale, which he uses to pick the items sold from the shelves. The warehouse clerk sends one copy of the stock release to the sales department and the second copy, along with the goods, to the shipping department. The warehouse clerk then updates the inventory subsidiary file to reflect the items and quantities shipped. Upon receipt of the stock release document, the sales clerk accesses the open sales order file from a terminal, closes the sales order, and files the stock release document in the sales department. The sales order system automatically posts these transactions to the sales, inventory control, and cost-of-goods-sold accounts in the general ledger file. Upon receipt of the goods and the stock release, the shipping department clerk prepares the goods for shipment to the customer. The clerk prepares three copies of the bill of lading. Two of these go with the goods to the carrier and the third, along with the stock release document, is filed in the shipping department. The billing department clerk reviews the closed sales orders from a terminal and prepares two copies of the sales invoice. One copy is mailed to the customer, and the other is filed in the billing department. The clerk then creates a new record in the accounts receivable subsidiary file. The sales order system automatically updates the accounts receivable control account in the general ledger file. CASH RECEIPTS PROCEDURES Mail room clerks open customer cash receipts, reviews the check and remittance advices for completeness, and prepares two copies of a remittance list. One copy is sent with the checks to the cash receipts department. The second copy of the remittance advices are sent to the billing department. When the cash receipts clerk receives the checks and remittance list, he verifies the checks received against those on the remittance list and signs the checks For Deposit Only. Once the checks are endorsed, he records the receipts in the cash receipts journal from his terminal. The clerk then fills out a deposit slip and deposits the checks in the bank. Upon receipt of the remittances, the billing department clerk records the amounts in the accounts receivable subsidiary ledger from the department terminal. The system automatically updates the AR control account in the general ledger Posavek has hired your public accounting firm to review its sales order procedures for internal control compliance and to make recommendations for changes. Required a. Create a data flow diagram of the current system. b. Create a system flowchart of the existing system. c. Analyze the physical internal control weaknesses in the system. d. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.arrow_forwardBannister Company, an electronics firm, buys circuit boards and manually inserts various electronic devices into the printed circuit board. Bannister sells its products to original equipment manufacturers. Profits for the last two years have been less than expected. Mandy Confer, owner of Bannister, was convinced that her firm needed to adopt a revenue growth and cost reduction strategy to increase overall profits. After a careful review of her firms condition, Mandy realized that the main obstacle for increasing revenues and reducing costs was the high defect rate of her products (a 6 percent reject rate). She was certain that revenues would grow if the defect rate was reduced dramatically. Costs would also decline as there would be fewer rejects and less rework. By decreasing the defect rate, customer satisfaction would increase, causing, in turn, an increase in market share. Mandy also felt that the following actions were needed to help ensure the success of the revenue growth and cost reduction strategy: a. Improve the soldering capabilities by sending employees to an outside course. b. Redesign the insertion process to eliminate some of the common mistakes. c. Improve the procurement process by selecting suppliers that provide higher-quality circuit boards. Required: 1. State the revenue growth and cost reduction strategy using a series of cause-and-effect relationships expressed as if-then statements. 2. Illustrate the strategy using a strategy map. 3. Explain how the revenue growth strategy can be tested. In your explanation, discuss the role of lead and lag measures, targets, and double-loop feedback.arrow_forward
- Costco is the largest chain of membership warehouse clubs in the world, based on sales volume, and it is the fifth largest general retailer in the United States. Costco focuses on selling products at low prices, often at a very high volume. These goods are usually bulk-packaged and marketed primarily to large families and businesses. Costco became the first company to grow from zero to 3 billion in sales in less than six years. In a recent fiscal year, Costcos sales totaled 116 billion, a 2 percent increase from 2015, and its net income reached 2.35 billion, an 1 percent decrease from 2015. This information, and much more, can be derived from the financial statements that merchandising firms such as Costco prepare on a regular basis to provide shareholders and other interested parties information about the companys activities and financial performance. 1. What type of information would a classified income statement provide to shareholders and other interested parties? 2. What type of information would a classified balance sheet provide to shareholders and other interested parties? Why would this information be important for calculating the working capital and the current ratio, for example?arrow_forwardWestern Boot Co. sells men’s, women’s, and children’s boots. For each type of boot sold, it operates a separate department that has its own manager. The manager of the men’s department has a sales staff of nine employees, the manager of the women’s department has six employees, and the manager of the children’s department has three employees. All departments are housed in a single store. In recent years, the children’s department has operated at a net loss and is expected to continue to do so. Last year’s income statements follow. *Before the paragraph it stated under check figures " a. Contribution to profit: $4,000"arrow_forwardWingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement: Sales $ 1,644,000 Variable expenses 608,620 Contribution margin 1,035,380 Fixed expenses 1,139,000 Net operating income (loss) $ (103,620) In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division East Central West Sales $ 444,000 $ 650,000 $ 550,000 Variable expenses as a percentage of sales 48% 27% 40% Traceable fixed expenses $ 282,000 $ 335,000 $ 200,000 Required: 1. Prepare a contribution format income statement segmented by divisions. 2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $20,000 based on the belief that it would increase that division's sales by 14%. Assuming…arrow_forward
- Stacy Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she haddiscovered about the standard costs at the Home Security Division. In looking over the past several yearsof quarterly income statements at the Home Security Division, she noticed that the first-quarter profits were always poor, the second-quarter profits were slightly better, the third- quarter profits were againslightly better, and the fourth quarter always ended with a spectacular performance in which the HomeSecurity Division managed to meet or exceed its target profit for the year. She also was concerned to findletters from the company’s external auditors to top management warning about an unusual use of standardcosts at the Home Security Division.When Ms. Cummins ran across these letters, she asked the assistant controller, Gary Farber, if he knewwhat was going on at the Home Security Division. Gary said that it was common knowledge in the companythat the vice president in charge…arrow_forwardBendOR, Inc., manufactures control panels for the electronics industry and has just completed its first year of operations. The following discussion took place between the controller, Gordon Merrick, and the company president, Matt McCray: Matt: I’ve been looking over our first year’s performance by quarters. Our earnings have been increasing each quarter, even though our sales have been flat and our prices and costs have not changed. Why is this? Gordon: Our actual sales have stayed even throughout the year, but we’ve been increasing the utilization of our factory every quarter. By keeping our factory utilization high, we will keep our costs down by allocating the fixed plant costs over a greater number of units. Naturally, this causes our cost per unit to be lower than it would be otherwise. Matt: Yes, but what good is this if we are unable to sell everything that we make? Our inventory is also increasing. Gordon: This is true. However, our unit costs are lower because of the…arrow_forwardConnelly Incorporated, a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company’s growth. To prepare for the growth, the accountant prepared the following data for the current year: Variable costs per ice cream maker Direct labor $ 13.50 Direct materials 14.50 Variable overhead 6.00 Total variable costs $ 34.00 Fixed costs Manufacturing $ 82,500 Selling 42,000 Administrative 356,000 Total fixed costs $ 480,500 Selling price per unit $ 67.00 Expected sales (units) 30,000 If the costs and sales price remain the same, what is the projected operating profit for the coming year? What is the breakeven point in units for the coming year?arrow_forward
- Connelly Incorporated, a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company’s growth. To prepare for the growth, the accountant prepared the following data for the current year: Variable costs per ice cream maker Direct labor $ 13.50 Direct materials 14.50 Variable overhead 6.00 Total variable costs $ 34.00 Fixed costs Manufacturing $ 82,500 Selling 42,000 Administrative 356,000 Total fixed costs $ 480,500 Selling price per unit $ 67.00 Expected sales (units) 30,000 a. What will be the new breakeven point if the additional $200,000 is spent on advertising? b. Prepare a contribution income statement at the new breakeven point. c. What is the percentage change in both fixed costs and in the breakeven point?arrow_forwardConnelly Incorporated, a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company’s growth. To prepare for the growth, the accountant prepared the following data for the current year: Variable costs per ice cream maker Direct labor $ 13.50 Direct materials 14.50 Variable overhead 6.00 Total variable costs $ 34.00 Fixed costs Manufacturing $ 82,500 Selling 42,000 Administrative 356,000 Total fixed costs $ 480,500 Selling price per unit $ 67.00 Expected sales (units) 30,000 Jan has set the sales target for 35,000 ice cream makers, which she thinks she can achieve by an additional fixed selling expense of $200,000 for advertising. All other costs remain as per the data in the above table. What will be the operating profit if the additional $200,000 is…arrow_forwardConnelly Incorporated, a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Because her business has grown, Jan DeJaney, the president, believes she needs an aggressive advertising campaign next year to maintain the company’s growth. To prepare for the growth, the accountant prepared the following data for the current year: Variable costs per ice cream maker Direct labor $ 13.50 Direct materials 14.50 Variable overhead 6.00 Total variable costs $ 34.00 Fixed costs Manufacturing $ 82,500 Selling 42,000 Administrative 356,000 Total fixed costs $ 480,500 Selling price per unit $ 67.00 Expected sales (units) 30,000 If the additional $200,000 is spent for advertising in the next year, what is the sales level (in units) needed to equal the current year’s operating profit at 30,000 units?arrow_forward
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