Financial & Managerial Accounting
14th Edition
ISBN: 9781337119207
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Question
Chapter 24, Problem 24.6EX
To determine
Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.
To Identify: The flaw in the decision of assuming that fixed costs would not be materially affected by discontinuation of the Children’s shoes.
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Top managers of Vermont Flooring are alarmed by their operating losses. They are considering dropping the laminate flooring product line. Company accountants have prepared the following analysis to help make this decision in the chart below:
Total fixed costs will not change if the company stops selling laminate flooring.
Requirements
1. Prepare an incremental analysis to show whether Vermont Flooring should discontinue the laminate flooring product line. Will discontinuing laminate flooring add $28,000 to operating income? Explain.
2. Assume that the company can avoid $32,000 of fixed expenses by discontinuing the laminate flooring product line (these costs are direct fixed costs of the laminate flooring product line). Prepare an incremental analysis to show whether the company should stop selling laminate flooring.
3. Now, assume that all of the fixed costs assigned to laminate flooring are direct fixed costs and can be avoided if the company stops selling laminate flooring. However,…
Bell enterprises currently produces several products. Model L78 is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended Dec 31.
Sales (1500 units at $320). $480,000
Variable costs(1500 units at $240) $360,000
Contribution margin $120,000
Fixed cost. $125,000
Operating loss. $(5,000)
You have been hired by Bell Ent to help analyse the decision as to whether to eliminate Model L78. Upon investigation you discover that if Model L78 is eliminated, $20,000 of the fixed costs shown on the above condensed income statement can be eliminated. The rest of the fixed costs allocated to Model L78 are common fixed costs that will be allocated to the remaining two products.
Assess whether Bell Ent should discontinue Model L78.
Making decisions about dropping a product
Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:
Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed selling and administrative expenses by $15,000.
Requirements
Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.
Prepare contribution margin income statements to show Security Team’s total operating income under the two alternatives: (a) with the industrial systems line and without the line. Compare the difference between the two alternatives’ income numbers to your answer to Requirement l.
What have you learned from this comparison in Requirement 2?
Chapter 24 Solutions
Financial & Managerial Accounting
Ch. 24 - Explain the meaning of (A) differential revenue,...Ch. 24 - A company could sell a building for 250,000 or...Ch. 24 - A chemical company has a commodity-grade and...Ch. 24 - A company accepts incremental business at a...Ch. 24 - Prob. 5DQCh. 24 - Prob. 6DQCh. 24 - In the long run, the normal selling price must he...Ch. 24 - Although the cost-plus approach to product pricing...Ch. 24 - Prob. 9DQCh. 24 - What is the appropriate measure of a products...
Ch. 24 - Lease or sell McFadden Company owns equipment with...Ch. 24 - Prob. 24.2BECh. 24 - Make or buy A company manufactures various-sized...Ch. 24 - Replace equipment A machine with a book value of...Ch. 24 - Process or sell Product J19 is produced for 11 per...Ch. 24 - Accept business at special price Product A is...Ch. 24 - Product cost markup percentage Green Thumb Garden...Ch. 24 - Prob. 24.8BECh. 24 - Differential analysis for a lease or sell decision...Ch. 24 - Prob. 24.2EXCh. 24 - Differential analysis for a discontinued product A...Ch. 24 - Differential analysis for a discontinued product...Ch. 24 - Prob. 24.5EXCh. 24 - Prob. 24.6EXCh. 24 - Make-or-buy decision Fremont Computer Company has...Ch. 24 - Make-or-buy decision for a service company The...Ch. 24 - Machine replacement decision A company is...Ch. 24 - Differential analysis for machine replacement Kim...Ch. 24 - Sell or process further Calgary Lumber Company...Ch. 24 - Sell or process further Rise N Shine Coffee...Ch. 24 - Decision on accepting additional business...Ch. 24 - Accepting business at a special price Portable...Ch. 24 - Prob. 24.15EXCh. 24 - Product cost method of product pricing La Femme...Ch. 24 - Product cost method of product costing Smart...Ch. 24 - Target costing Toyota Motor Corporation uses...Ch. 24 - Target costing Instant Image Inc. manufactures...Ch. 24 - Prob. 24.20EXCh. 24 - Product decisions under bottlenecked operations...Ch. 24 - Appendix Total cost method of product pricing...Ch. 24 - Appendix Variable cost method of product pricing...Ch. 24 - Differential analysis involving opportunity costs...Ch. 24 - Differential analysis for machine replacement...Ch. 24 - Differential analysis for sales promotion proposal...Ch. 24 - Differential analysis for further processing The...Ch. 24 - Prob. 24.5APRCh. 24 - Product pricing and profit analysis with...Ch. 24 - Differential analysis involving opportunity costs...Ch. 24 - Differential analysis for machine replacement...Ch. 24 - Differential analysis for sales promotion proposal...Ch. 24 - Differential analysis for further processing The...Ch. 24 - Prob. 24.5BPRCh. 24 - Prob. 24.6BPRCh. 24 - Service yield pricing and differential analysis...Ch. 24 - Prob. 2ADMCh. 24 - Prob. 3ADMCh. 24 - Ethics in Action Aaron McKinney is a cost...Ch. 24 - Prob. 24.3TIF
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