Question
1. Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $310,000
1. Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $310,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:
Product | Selling Price | Quarterly Output | ||||
A | $ | 12.00 | per pound | 11,400 | pounds | |
B | $ | 6.00 | per pound | 17,900 | pounds | |
C | $ | 18.00 | per gallon | 2,600 | gallons | |
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:
Product | Additional Processing Costs | Selling Price | |||
A | $ | 52,470 | $ | 16.30 | per pound |
B | $ | 74,345 | $ | 11.30 | per pound |
C | $ | 27,460 | $ | 25.30 | per gallon |
Required:
1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?
2.
Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:
Superior Markets, Inc. Income Statement For the Quarter Ended September 30 | ||||||||||||
Total | North Store | South Store | East Store | |||||||||
Sales | $ | 4,100,000 | $ | 860,000 | $ | 1,640,000 | $ | 1,600,000 | ||||
Cost of goods sold | 2,255,000 | 515,000 | 860,000 | 880,000 | ||||||||
Gross margin | 1,845,000 | 345,000 | 780,000 | 720,000 | ||||||||
Selling and administrative expenses: | ||||||||||||
Selling expenses | 839,000 | 242,400 | 320,500 | 276,100 | ||||||||
Administrative expenses | 438,000 | 117,000 | 167,400 | 153,600 | ||||||||
Total expenses | 1,277,000 | 359,400 | 487,900 | 429,700 | ||||||||
Net operating income (loss) | $ | 568,000 | $ | (14,400 | ) | $ | 292,100 | $ | 290,300 | |||
The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:
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The breakdown of the selling and administrative expenses that are shown above is as follows:
Total | North Store | South Store | East Store | |||||
Selling expenses: | ||||||||
Sales salaries | $ | 263,400 | $ | 69,600 | $ | 80,600 | $ | 113,200 |
Direct advertising | 176,000 | 62,000 | 83,000 | 31,000 | ||||
General advertising* | 61,500 | 12,900 | 24,600 | 24,000 | ||||
Store rent | 280,000 | 80,000 | 113,000 | 87,000 | ||||
Depreciation of store fixtures | 21,500 | 5,700 | 7,100 | 8,700 | ||||
Delivery salaries | 24,300 | 8,100 | 8,100 | 8,100 | ||||
Depreciation of delivery equipment | 12,300 | 4,100 | 4,100 | 4,100 | ||||
Total selling expenses | $ | 839,000 | $ | 242,400 | $ | 320,500 | $ | 276,100 |
*Allocated on the basis of sales dollars.
Total | North Store | South Store | East Store | |||||
Administrative expenses: | ||||||||
Store managers' salaries | $ | 86,500 | $ | 26,500 | $ | 35,500 | $ | 24,500 |
General office salaries* | 61,500 | 12,900 | 24,600 | 24,000 | ||||
Insurance on fixtures and inventory | 36,000 | 10,800 | 14,500 | 10,700 | ||||
Utilities | 86,145 | 27,735 | 29,480 | 28,930 | ||||
Employment taxes | 65,355 | 17,565 | 22,320 | 25,470 | ||||
General officeother* | 102,500 | 21,500 | 41,000 | 40,000 | ||||
Total administrative expenses | $ | 438,000 | $ | 117,000 | $ | 167,400 | $ | 153,600 |
*Allocated on the basis of sales dollars.
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The lease on the building housing the North Store can be broken with no penalty.
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The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
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The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $11,900 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,900 per quarter. All other managers and employees in the North store would be discharged.
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The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This persons salary is $5,100 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.
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The company pays employment taxes equal to 15% of their employees' salaries.
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One-third of the insurance in the North Store is on the stores fixtures.
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The General office salaries and General officeother relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This persons compensation is $6,450 per quarter.
Required:
1. How much employee salaries will the company avoid if it closes the North Store?
2. How much employment taxes will the company avoid if it closes the North Store?
3. What is the financial advantage (disadvantage) of closing the North Store?
4. Assuming that the North Store's floor space cant be subleased, would you recommend closing the North Store?
5. Assume that the North Store's floor space cant be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?
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