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?
Trending nowThis is a popular solution!
Chapter 18 Solutions
Bundle: Cornerstones of Cost Management, Loose-Leaf Version, 4th + CengageNOWv2, 1 term Printed Access Card
- Millard Corporation is a wholesale distributor of office products. It purchases office products from manufacturers and distributes them in the West, Central, and East regions. Each of these regions is about the same size and each has its own manager and sales staff. The company has been experiencing losses for many months. In an effort to improve performance, management has requested that the monthly income statement be segmented by sales region. The company’s first effort at preparing a segmented income statement for May is given below. Sales Region West Central East Sales $ 311,000 $ 796,000 $ 703,000 Regional expenses (traceable): Cost of goods sold 94,000 240,000 312,000 Advertising 105,000 236,000 240,000 Salaries 54,000 54,000 107,000 Utilities 8,700 16,100 13,600 Depreciation 21,000 35,000 28,000 Shipping expense 17,000 31,000 36,000 Total regional expenses 299,700 612,100 736,600 Regional income (loss) before corporate expenses 11,300…arrow_forwardMillard Corporation is a wholesale distributor of office products. It purchases office products from manufacturers and distributes them in the West, Central, and East regions. Each of these regions is about the same size and each has its own manager and sales staff. The company has been experiencing losses for many months. In an effort to improve performance, management has requested that the monthly income statement be segmented by sales region. The company's first effort at preparing a segmented income statement for May is given below. Sales Regional expenses (traceable): Cost of goods sold Advertising Salaries Utilities Depreciation Shipping expense Total regional expenses Regional income (loss) before corporate expenses Corporate expenses: Advertising (general) General administrative expense Total corporate expenses Net operating income (loss) Variable expenses: Total variable expenses Traceable fixed expenses: Total traceable fixed expenses Common fixed expenses: Total common…arrow_forwardMillard Corporation is a wholesale distributor of office products. It purchases office products from manufacturers and distributes them in the West, Central, and East regions. Each of these regions is about the same size and each has its own manager and sales staff The company has been experiencing losses for many months. In an effort to improve performance, management has requested that the monthly income statement be segmented by sales region. The company's first effort at preparing a segmented income statement for May is given below. Sales Regional expenses traceable): Cost of goods sold Advertising Salaries Utilities Depreciation Shipping expense Total regional expenses Regional income (less) before corporate expenses Corporate expenses Advertising (general) General administrative expense Mest $311,000 92,000 110,000 59,000 8.900 25,000 15,000 309,900 1.100 14,000 20,000 34,000 5 (32,900) Sales Region Central $800,000 245,000 245,000 59,000 15,500 33,000 28,000 hiso 2 East…arrow_forward
- BendOR, 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_forwardSwain Athletic Gear (SAG) operates six retall outlets in a large Midwest city. One is in the center of the city on Cornwall Street and the others are scattered around the perimeter of the city. Management at SAG is concerned about declining sales and profitability of the Cornwall store and believes that outlet has been a drag on profits in recent years. The most recent Income statement for the Cornwall store follows. SWAIN ATHLETIC GEAR Cornwall Street Store Income Statement For the Year Ending February 28 Sales revenue Costs Cost of goods sold Advertising Store administrative salaries Sales commissions Leases and utilities Allocated corporate support Total costs Net loss before tax benefit Tax benefit at 25% Net loss The CFO at SAG has asked for your advice on closing the Cornwall Street store. If the Cornwall Street store is closed, neither total corporate support costs nor operations or costs of the other stores are expected to change. Required: a. Using the worksheet below,…arrow_forwardRichmond, Inc. operates 44 shopping malls. Two years ago, the Richmond Board of Directors decided to renovate the store to attract more top-class customers. Before implementing these plans, Linda Pearlman, assistant financial manager, was asked to oversee financial reporting for the pilot shop, and it was known that she and other executives receive bonuses for the company's sales growth and profitability. As she filled in the financial report, she discovers that there are inventory items that have been out of fashion and that these items should be discounted for sale or returned to the manufacturer. She consulted this situation with her management colleagues, who agreed that it was a good idea not to list these products as obsolete items. If they do, they will have a negative impact on their financial performance and certainly affect their bonuses. Do you think that what Pearlman would do without reporting the product as a falling product? Are there ethical issues in accounting? What…arrow_forward
- Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.arrow_forwardSwain Athletic Gear (SAG) operates six retail outlets in a large Midwest city. One is in the center of the city on Cornwall Street and the others are scattered around the perimeter of the city. Management at SAG is concerned about declining sales and profitability of the Cornwall store and believes that outlet has been a drag on profits in recent years. The most recent income statement for the Cornwall store follows. SWAIN ATHLETIC GEAR Cornwall Street Store Income Statement For the Year Ending February 28 Sales revenue $ 12,300,000 Costs Cost of goods sold $ 5,289,000 Advertising 1,421,000 Store administrative salaries 975,000 Sales commissions 1,056,000 Leases and utilities 2,100,000 Allocated corporate support 1,622,000 Total costs $ 12,463,000 Net loss before tax benefit $ (163,000) Tax benefit at 25% (40,750) Net loss $ (122,250) The CFO at SAG has asked for your advice on closing the Cornwall Street store. If the Cornwall Street store is…arrow_forwardBig Apple Design Company specializes in designing commercial office space in Chicago. The firm’s president recently reviewed the following income statement and noticed that operating profits were below her expectations. She had a hunch that certain customers were not profitable for the company and asked the controller to perform a customer-profitability analysis showing profitability by customer for the month of March. Required: Put yourself in the position of Big Apple’s controller and write a memo to the president to accompany the customer-profitability graph. Comment on the implications of the customer-profitability analysis and raise four or more questions that should be addressed by the firm’smanagement team.arrow_forward
- Lisa currently manages the polished chrome division of Whispering Broadway, a business that specializes in ceiling light fixtures. Its performance has been stable for the past few years. However, the crystal division has been losing market share, while the rustic iron and chrome divisions have been growing. For the most part, executives feel that these changes are a result of customer preferences and current trends versus the quality or prices of their products. While they expect preferences to return to the crystal product line in the next five years, a short-term decision must be made now. Budgeted financial information for Whispering Broadway's upcoming fiscal year is presented below for each division Sales Variable costs Contribution margin Fixed costs Operating income Chrome $1,230,000 753,000 477,000 236.000 Crystal $424.000 298.000 126.000 236,000 $241.000 $(110,000) Iron $752,000 313,000 All foxed costs are currently assigned evenly to all divisions. 439,000 236,000 $203.000arrow_forwardBernice Mountaindog was glad to be back at Sea Shore Salt. Employees were treated well. When she had asked a year ago for a leave of absence to complete her degree in finance, top management promptly agreed. When she returned with a honors degree, she was promoted form administrative assistant (she had been secretary to Joe-Bob Brinepool, the president) to treasury analyst.Bernice thought the company’s prospect were good. Sure, table salt was a mature business, but Sea Shore Salt had grown steadily at the expense of its less well known competitors. The company’s brand name was an important advantage, despite the difficulty most customers had in pronouncing it rapidly.Bernice started work on January 2, 2009. The first 2 weeks went smoothly. Then Mr. Brinepool’s cost of capital to other managers. The memo came as a surprise to Bernice, so she stayed late to prepare for the questions that would surely come the next day. The company’s bank charged interest at current market rates, and the…arrow_forwardManuel Inc. produces textiles in many different forms. After recording lower than anticipated profits last year, Manuel has decided to shut down one of its divisions that is not performing well. The accounting manager has compiled the following data on the two divisions being considered for closing and has asked you to evaluate the short-term and long-term effects on profits of closing each division. Which division should be closed if Manuel is most concerned with increasing long-run profits? Winter Outerwear High-End Suits Net revenues $ 1,200,000 $ 5,200,000 Variable costs 660,000 2,160,000 Contribution margin 540,000 3,040,000 Controllable fixed costs 0 2,020,000 Controllable margin 540,000 1,020,000 Noncontrollable fixed costs 770,000 1,540,000 Contribution by division $ (230,000 ) $ (520,000 ) multiple choice Winter Outerwear High-End Suits Closing either would have the same…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningAccounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,