Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 17, Problem 17E
1.
To determine
Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines.
1.
Expert Solution
Explanation of Solution
Tactical decision making: Tactical decision making is a process in which the company can choose the correct alternative based on the profitability. In tactical decision making, offer price of a product is compared with the normal selling price and offer price less than the normal selling price of product is considered as the idle capacity for decision making.
Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines as follows:
| Particulars | Corporate | Wedding | Special occasion | Total |
| Revenues | $55,300 | $195,000 | $168,000 | $418,300 |
| Less: Variable costs | $22,120 | $97,500 | $50,400 | $170,020 |
| Contribution margin | $33,180 | $97,500 | $117,600 | $248,280 |
| Less: Direct fixed expense: | ||||
| Negotiating (1) | $8,000 | $24,000 | $8,000 | $40,000 |
| Setting up (2) | $6,000 | $24,000 | $30,000 | $60,000 |
| Product margin | $19,180 | $49,500 | $79,600 | $148,280 |
| Less: Common fixed expense: | ||||
| Operating expense | $75,000 | |||
| Selling expense | $55,000 | |||
| Operating income | $18,280 |
Table (1)
Product margin of three product line is less than the contribution margin and corporate line has least profit than other product line. Hence, person J should find the best product line to increase the overall profitability.
Note: Common fixed operating expense after total negotiation and setup cost is $75,000
Working note (1):
Calculate the negotiating cost for each product line.
| Particulars | Corporate | Wedding | Special occasion | Total |
| Negotiating hours (E) | 400 | 1,200 | 400 | 2,000 |
| Total cost of negotiating (F) | $40,000 | $40,000 | $40,000 | $40,000 |
|
Negotiating cost | $8,000 | $24,000 | $8,000 | $40,000 |
Table (2)
Working note (2):
Calculate the setting up cost for each product line.
| Particulars | Corporate | Wedding | Special occasion | Total |
| Setting up hours (E) | 100 | 400 | 500 | 1,000 |
| Total cost of negotiating (F) | $60,000 | $60,000 | $60,000 | $60,000 |
|
Negotiating cost | $6,000 | $24,000 | $30,000 | $60,000 |
Table (3)
2.
To determine
Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment.
2.
Expert Solution
Explanation of Solution
Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment as follows:
| Particulars | Corporate | Wedding | Special occasion | Total |
| Revenues |
$41,475 (3) | $224,250 (4) | $184,800 (5) | $450,525 |
| Less: Variable costs | $17,696 | $97,500 | $55,440 | $170,636 |
| Contribution margin | $23,779 | $126,750 | $129,360 | $279,889 |
| Less: Direct fixed expense: | ||||
| Negotiating (1) | $8,000 | $24,000 | $8,000 | $40,000 |
| Setting up (2) | $6,000 | $24,000 | $30,000 | $60,000 |
| Product margin | $9,779 | $78,750 | $91,360 | $179,889 |
| Less: Common fixed expense: | ||||
| Operating expense | $75,000 | |||
| Selling expense | $55,000 | |||
| Operating income | $49,889 |
Table (4)
In this case, product marine of corporate line is less than the other two lines. If Person J does not expect the corporate event, then Person J should drop the corporate line and concentrate to increase the profitability of other two product lines.
Working note (3):
Calculate the new revenue for corporate line.
Working note (4):
Calculate the new revenue for wedding line.
Working note (5):
Calculate the new revenue for special occasion line.
Working note (6):
Calculate the new variable expense for corporate line.
Working note (7):
Calculate the new variable expense for special occasion line.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
You are an auditor at a public accounting firm. You and your team are entrusted by Partner to handle clients engaged in the home appliance retail business. Your client is a company that has go public. The client's financial statement in the previous year reported a loss, however this year reported a material gain. After you check, it turns out that the client reports income that is not much different from the previous year, however, there can be a profit due to the decrease in Cost of Goods Sold (COGS). The client reports that the amount of inventory has increased drastically, even though sales have not increased and the account payable balance is almost the same as in previous years, this has led to suspicion of a double counting scheme in the client's inventory. In addition, when a random check was carried out incidentally at one of the client's warehouses, it was found that many inventory were out of date but the client did not make adjustments.
Question:a. If you wanted to perform…
James Henderson is the president of York Athletics, a producer of hats and jerseys and other accessories for fans of several professional sports teams. Imagine you are the accountant in charge of all accounting functions at Sportswear. She reviewed the most recent financial statements, and noticed that the company did not do as well as they had planned. She wanted to look more closely at the profitability of each of our products to determine exactly what happened, but realized that she did not have this information in the financial statements. According to the accountant, financial statements are prepared according to the Generally Accepted Accounting Principles (GAAP) and do not require their company to disclose profitability by product, and therefore did not prefer not to make this information public. Accordingly, product profitability information stays in-house and is prepared by the company’s managerial accountant.
It is common among companies like York Athletics to prefer not to…
George Costanza is an accountant for Vandelay Industries, a footwear and apparel company. The company's revenue and net income have increased by more than 100% over the past three years. During the same period, George and his colleagues in the Accounting Department have not received a raise or salary increase. Frustrated by not receiving a raise while the company has thrived, George has begun submitting expense reimbursements for personal purchases. George has a good relationship with his supervisor, and the supervisor simply "signs off" on George's expense reimbursements. George suspects that his supervisor knows that he is submitting personal expenses for reimbursement and is "looking the other way" because George has not received a raise in the past three years.
Are George and his supervisor acting in an ethical manner? Why or why not?
Chapter 17 Solutions
Cornerstones of Cost Management (Cornerstones Series)
Ch. 17 - What is tactical decision making?Ch. 17 - Tactical decisions are often small-scale decisions...Ch. 17 - What is tactical cost analysis? What steps in the...Ch. 17 - What is a relevant cost? Explain why depreciation...Ch. 17 - Give an example of a future cost that is not...Ch. 17 - Prob. 7DQCh. 17 - Can direct materials ever be irrelevant in a...Ch. 17 - What role do past costs play in tactical cost...Ch. 17 - When will flexible resources be relevant to a...Ch. 17 - Prob. 11DQ
Ch. 17 - Prob. 12DQCh. 17 - Prob. 13DQCh. 17 - Prob. 14DQCh. 17 - Why would a firm ever offer a price on a product...Ch. 17 - Each year, Basu Company produces 18,000 units of a...Ch. 17 - Reshier Company makes three types of rug...Ch. 17 - Sequoia Paper Products, Inc., manufactures boxed...Ch. 17 - Betram Chemicals Company processes a number of...Ch. 17 - Prob. 5ECh. 17 - Elliott, Inc., has four salaried clerks to process...Ch. 17 - Prob. 7ECh. 17 - Feinan Sports, Inc., manufactures sporting...Ch. 17 - Wehner Company is currently manufacturing Part...Ch. 17 - Brees, Inc., a manufacturer of golf carts, has...Ch. 17 - Prob. 11ECh. 17 - Nutterco, Inc., produces two types of nut butter:...Ch. 17 - Carleigh, Inc., is a pork processor. Its plants,...Ch. 17 - Global Reach, Inc., is considering opening a new...Ch. 17 - Tony and Tina Roselli own and run TNTs Pizza...Ch. 17 - Jason Rogers works full-time for UPS and runs a...Ch. 17 - Prob. 17ECh. 17 - A company is considering a special order for 1,000...Ch. 17 - Walloon Company produced 150 defective units last...Ch. 17 - Pasha Company produced 50 defective units last...Ch. 17 - Future costs that differ across alternatives are:...Ch. 17 - Thaler Company bought 26,000 of raw materials a...Ch. 17 - Norton Products, Inc., manufactures...Ch. 17 - Prob. 24PCh. 17 - Fiorello Company manufactures two types of...Ch. 17 - St. Johns Medical Center (SJMC) has five medical...Ch. 17 - Brandy Dees recently bought Nievo Enterprises, a...Ch. 17 - Apollonia Dental Services is part of an HMO that...Ch. 17 - Pharmaco Corporation buys three chemicals that are...Ch. 17 - KarlAuto Corporation manufactures automobiles,...Ch. 17 - Morrill Company produces two different types of...Ch. 17 - Paladin Company manufactures plain-paper fax...
Knowledge Booster
Similar questions
- The desire to maximize profits can work against racial and other types of discrimination. To see why, consider two equally productive accountants named Ted and Jared. Ted is black, and Jared is white. Both can complete 10 audits per month. Instructions: Enter your answers as a whole number. In part b, round your answer for profit rate to 1 decimal place. a. Suppose that for any accounting firm that hires either Ted or Jared, all the other costs of performing an audit (besides paying either Ted or Jared) come to $1,000 per audit. If the going rate that must be paid to hire an accountant is $7,000 per month, how much will it cost an accounting firm to produce one audit if it hires either Ted or Jared to do the work? $1,700 b. If the market price that accounting firms charge their clients for an audit is $1,800, what would the accounting profit per audit be for a firm that hired either Ted or Jared? $ 100 What is the profit rate as a percentage? 5.88 percent c. Suppose that firm A…arrow_forward4. Terry Ray manages a large hotel in an urban Midwestern city. He wants to use vertical analysis and a slightly modified version of the USALI income statement (P&L) for his property to assess its financial performance last year. Complete the spreadsheet to help him evaluate his effectiveness as a manager. Terry's P&L TOTAL REVENUE Rooms-Revenue Payroll and Related Expenses Other Expenses Department Income Food-Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Beverage Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Telecommunications-Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Other Operated Departments-Revenue Cost of Sales Payroll and Related Expenses Other Expenses Department Income Rentals and Other Income-Revenue Cost of Sales $ % 5,100,350 100.00 3,000,000 535,600 229,450 1,400,000 386,100 395,200 96,200 560,000 81,510 96,590 36,400 14,000 30,550 9,750 5,200 105,000…arrow_forward6 Becky and Carl work for a marketing firm. The two accountants discuss the organization’s financial performance. Carl asks Becky, “What’s the bottom line?” Becky reviews a financial report that shows the firm’s profitability over the last quarter. The document Becky reviews is called the Multiple Choice tax return. ledger. audit. income statement. 7 Diedre works at Sally’s Autobody Workshop. Her main job responsibility is to record the routine, day-to-day business transactions of the firm. Based on this information, Diedre is a Multiple Choice tax accountant. forensic accountant. bookkeeper. CMA. 8 A new fitness company called Jump Athletics receives a trademark for its brand name. The trademark received by Jump Athletics is a Multiple Choice return on asset. current asset. liquid asset. fixed asset. 9 Rowena, a senior manager at Top of the Line Publishing, wants a quick snapshot of the company’s financial position before she goes to a manager’s meeting. In this case, which of the…arrow_forward
- chil 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. en's boots. For each type of boot sold, it operates a separate department that Sales Cost of goods sold Gross margin Department manager's salary Sales commissions Rent on store lease Store utilities Net income (loss) es Required Men's Department $ 690,000 (275,000) Women's Department Children's Department $ 490,000 $ 230,000 (184,000) (106,375) 415,000 306,000 123,625 (71,000) (60,000) (40,000) (125,200) (94,600) (37,400) (40,000) (40,000) (40,000) (23,000) (23,000) (23,000) $ 155,800 $ 88,400 $ (16,775) a. Calculate the children's department's contribution to profit. Determine…arrow_forwardTami Tyler opened Tami's Creations, Incorporated, a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler's personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University. Tami's Creations, Incorporated Income Statement For the Quarter Ended March 31 $ 1,128,000 Sales (28,200 units) Variable expenses: Variable cost of goods sold Variable selling and administrative Contribution margin Fixed expenses: $ 431,460 172,020 603,480 524,520 Fixed manufacturing overhead Fixed selling and administrative 249,600 536,520 $ (12,000) 286,920 Net operating loss Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption…arrow_forwardYou should use a financial calculator and Excel to solve the problems. Discuss the differences between efficiency and effectiveness. Why is it important for small business owners to understand the difference between profit and profitability? What financial ratio is used to determine profitability? Sam quit a $30,000-a-year job with a local heating and air conditioning firm to go into business for himself. After his first year in business, his accountant showed him an income statement that indicated Sam’s firm had a profit of $40,000. During this year Sam had drawn a salary of $20,000. What was Sam’s accounting profit, his entrepreneurial profit, and his opportunity cost? Explain the difference between accounting and entrepreneurial profit. Discuss the differences between operating and financial leverage. You are going to open a business making custom cabinets. You can sell each cabinet for $80. It takes a cabinet-maker approximately 45 minutes to make one cabinet. Each…arrow_forward
- Assume you are the management accountant for the Foleo Group. James and Leon have called you and the CFO into a meeting to discuss concerns they have with the number of SliFones that are being returned by customers under warranty. They have pulled some numbers from the accounting system and elsewhere regarding not only the warranty costs, but also other expenses associated with the quality of the phones for the current year. The directors have handed you the below costs and asked you to look into why faulty SliFones are being returned by customers. \table[[Quality Activity,\table[[Cost of Quality],[Activity]]],[Testing phones during production processes,$25,000arrow_forwardJon Yanta, owner of Yanta’s Yard Care, is disappointed that his business incurred a net loss for June of the current year. Mr. Yanta would have preferred not to have to reduce his capital by $880.00. He knows that you are studying accounting, so Mr. Yanta asks you to analyze his work sheet for June. Review the statements provided in the worksheet, and based on your analysis of the work sheet, indicate the likely causes of the net loss for Yanta’s Yard Care as well as the steps Mr. Yanta can take to avoid a net loss in future months. Select True or False for each of the given statements. Jon Yanta’s sales exceeded the amount of his expenses. Reducing expenses could improve the company’s results. An increase in total revenue could result in net income. Rent expense of $5,500 would have resulted in net income. Supplies expense were not a significant portion of total expenses. Selling more services would have no effect on revenues. An increase in prices could result in higher…arrow_forwardMargaret is the manager of a medium-size company. A few years ago, Margaret persuaded the owner to base a part of her compensation on the net income of the company. Each December she estimates year-end financial figures in anticipation of the bonus she will receive. If the bonus is not as high as she would like, she offers several recommendations to the accountant for year-end adjustments. One of her favorite recommendations is for the controller to reduce the estimate of doubtful accounts. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?arrow_forward
- Richmond, 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_forwardYour answer is partially correct. As a new intern for the local branch office of a national brokerage firm, you are excited to get an assignment that allows you to use your accounting expertise. Your supervisor provides you with the spreadsheet below, which contains data for the most recent quarter for three companies that the firm has been recommending to its clients as "buys." Each of the companies' returns on assets has outperformed their industry cohorts in the past. But, given recent challenges in their markets, there is concern that the companies may experience operating challenges and lower earnings. (All numbers in millions, except return on assets.) Company Sprint Nextel Washington Mutual E* Trade Financial Fair Value of Company $36,351 11,582 Loss on Impairment Account Titles and Explanation Goodwill 1,628 eTextbook and Medial Book Value (Net Assets Including Goodwill) $51,201 23,941 4,024 Carrying Value of Goodwill $30,618 9,052 2,015 (c) Estimate the amount of goodwill…arrow_forwardMargaret is the manager of a medium-size company. A few years ago, Margaret persuaded the owner to base a part of her compensation on the net income of the company. Each December she estimates year-end financial figures in anticipation of the bonus she will receive. If the bonus is not as high as she would like, she offers several recommendations to the accountant for year-end adjustments. One of her favorite recommendations is for the controller to reduce the estimate of doubtful accounts. What type of internal control(s) might be useful for this company in overseeing the manager's recommendation for accounting changes?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning