Using a product profitability report to guide strategic decisions
The controller of Boom Box Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report. In addition, the controller interviewed the vice president of marketing, who indicated that the floor loudspeakers were an older product that was highly recognized in the marketplace. The ribbon loudspeakers were a new product that was recently launched. The ribbon loudspeakers are a new technology that have no competition in the marketplace, and it is hoped that they will become an important future addition to the company’s product portfolio. Initial indications are that the product is well received by customers. The controller believes that the
Floor Loudspeakers | Bookshelf Loudspeakers | Ribbon Loudspeakers | Totals | |
Sales | $ 1,500,000 | $ 1,200,000 | $900,000 | $3,600,000 |
Less cost of goods sold | 1,050,000 | 720,000 | 810,000 | 2,580,000 |
Gross profit | $ 450,000 | $ 480,000 | $ 90,000 | $ 1,020,000 |
Less marketing expenses | 600,000 | 120,000 | 72,000 | 792,000 |
Income from operations | $ (150,000) | $360,000 | $ 18,000 | $ 228,000 |
- 1. Calculate the gross profit and income from operations to sales ratios for each product.
- 2. Write a memo using the product profitability report and the calculations in (I) to make recommendations to management with respect to strategies for the three products.
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EBK FINANCIAL & MANAGERIAL ACCOUNTING
- Randy Harris, controller, has been given the charge to implement an advanced cost management system. As part of this process, he needs to identify activity drivers for the activities of the firm. During the past four months, Randy has spent considerable effort identifying activities, their associated costs, and possible drivers for the activities costs. Initially, Randy made his selections based on his own judgment using his experience and input from employees who perform the activities. Later, he used regression analysis to confirm his judgment. Randy prefers to use one driver per activity, provided that an R2 of at least 80 percent can be produced. Otherwise, multiple drivers will be used, based on evidence provided by multiple regression analysis. For example, the activity of inspecting finished goods produced an R2 of less than 80 percent for any single activity driver. 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