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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Segmented Income Statement, Management Decision Making

FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows:

Chapter 8, Problem 56P, Segmented Income Statement, Management Decision Making FunTime Company produces three lines of

Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTime’s vice president of marketing.

Required:

  1. 1. CONCEPTUAL CONNECTION Jim believes that by increasing advertising by $1,000 ($250 for the scented line and $750 for the musical line), sales of those two lines would increase by 30%. If you were Kathy, how would you react to this information?
  2. 2. CONCEPTUAL CONNECTION Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Given this information, would it be profitable to eliminate the scented and musical lines?
  3. 3. CONCEPTUAL CONNECTION Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? Identify the best combination for the firm.

1.

To determine

Describe the reaction of Person K on the increase in advertisement expense and sales.

Explanation

Segmented Income Statement:

Variable costing is used in the preparation of a segmented income statement. In this income statement, the variable expenses are recorded separately from the fixed expenses which are further divided into direct fixed expenses and common expenses.

The following table represents the segmented income statement of Company F:

Company F
Segmented Income Statement
For the Previous Year
 Scented ($)Musical ($)Regular ($)Total ($)
Sales113,00019,50025,00057,500
Less variable expenses29,10015,60012,50037,200
Contribution margin3,9003,90012,50020,300
Less direct fixed expenses3:4,2505,7503,00013,000
Segment margin(350)(1,850)9,5007,300
Less common fixed expenses:   7,500
Operating income (loss)   (200)

Table (1)

The amount of operating loss is $200. Person K should accept the increase in the direct fixed expense and sales. The overall operating loss before the increase is $1,000 whereas the overall operating loss after the increase is $200. This represents that there is a decrease in the operating loss after an increase in the direct fixed expense and sales.

Working Notes:

1. Calculation of revised sales for scented cards:

Revised sales=Sales+(Sales×Increased percentage)=$10,000+($10,000×30%)=$10,000+$3,000=$13,000

Hence, the amount of revised sales for scented cards is $13,000.

Calculation of revised sales for musical cards:

Revised sales=Sales+(Sales×Increased percentage)=$15,000+($15,000×30%)=$15,000+$4,500=$19,500

Hence, the amount of revised sales for musical cards is $19,500

2.

To determine

Describe whether it would be beneficial for the company to eliminate the scented and musical lines.

3.

To determine

Describe whether the combination of an increase in advertising and eliminating either of the lines would be beneficial. Also, identify the best combination.

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