32. Customer Decision. The following customer segmented annual income statement is for Owens Accounting Services, Inc.: Customers Total Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) Cherry Corp Orange, Inc. $ 500,000 $ 500,000 400,000 370,000 $ 100,000 $ 130,000 30,000 40,000 40,000 40,000 $ 30,000 $ 50,000 Apple, LLP $ 250,000 180,000 $ 70,000 65,000 20,000 $ (15,000) $1,250,000 950,000 $ 300,000 135,000 100,000 $ 65,000 Management is concerned about the losses associated with the Apple LLP account and would like to drop this customer. Allocated fixed costs are assigned to customers based on sales revenue. If Apple LLP is dropped, total allocated fixed costs are assigned to the remaining customers, and all variable and direct fixed costs for the Apple LLP account will be eliminated. Required: a. Perform differential analysis using the format presented in Table 7.12, Table 7.13, and Table 7.14. Assume keeping all customers is Alternative 1, and dropping the Apple LLP account is Alternative 2. b. Which alternative is best? Explain. C. Summarize the result of dropping the Apple LLP account using the format presented in Table 7.15. d. Explain why the loss shown for the Apple LLP account in the segmented income statement might be misleading to management. 32. Customer Decision a. Alternative 1 (Keep all customers) Customers Orange Inc. Cherry Corp. Apple LLP Total $ 300,000 Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) Incorrect Incorrect Correct Incorrect Incorrect Incorrect Total Alternative 2 (Drop Apple LLP account) Customers Cherry Corp. Orange Inc. Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit (loss) $ 230,000 Incorrect Incorrect Correct Incorrect Incorrect Incorrect Differential Analysis (Keep all customers) Alternative 1 Total (Drop Apple LLP account) Alternative 2 Total Differential Amount Alternative 1 is: Differential Amount Incorrect Correct Incorrect Incorrect 180,000 Sales revenue Variable costs Contribution margin Direct fixed costs Allocated fixed costs Profit Higher Alternative 1 Incorrect Correct Incorrect Incorrect Incorrect Incorrect Incorrect b. Use the dropdown menu to select the best answer from the options below. a. Keeping all customers is best since it results in the highest company profit. b. Keeping all customers is best since it results in the lowest company costs. c. Dropping the Apple LLP customer is best since it results in the highest company profit. d. Dropping the Apple LLP customer is best since it results in the lowest company costs. c. Customer Decision (continued) Amounts shown in parentheses indicate a negative impact on profit, and amounts without parentheses indicate a positive impact on profit: Result of Dropping Apple LLP Account Sales revenue lost ($250,000) Dollar Description Amount Correct Correct Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Jincorrect d. Use the dropdown menu to select the best answer from the options below. a. It might be misleading because the allocated and direct fixed costs are not eliminated if the account is dropped, but instead are re-allocated to the remaining accounts. b. It might be misleading because the direct fixed costs are not eliminated if the account is dropped, but instead are re-allocated to the remaining accounts. c. It might be misleading because the allocated fixed costs are eliminated if the account is dropped d. It might be misleading because the allocated fixed costs are not eliminated if the account is dropped, but instead are re-allocated to the remaining accounts
