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CH06 COMPUTER LAB EXERCISE BACKGROUND INFORMATION: 1. Frames Corp has two branches (North and South) 2. 2011 financial information for the North is provided as
| CH06 COMPUTER LAB EXERCISE | |||||||||
| BACKGROUND INFORMATION: | |||||||||
| 1. Frames Corp has two branches (North and South) | |||||||||
| 2. 2011 financial information for the North is provided as follows | |||||||||
| (Sales $100, variable expense $50, fixed expenses that | |||||||||
| would go away if the North branch is closed $55) | |||||||||
| 3. 2011 financial information for the South is provided as follows | |||||||||
| (Sales $200, variable expense $160, fixed expenses that | |||||||||
| would go away if the South branch is closed $20) | |||||||||
| 4. In addition, Frames had $10 of 2011 fixed expenses at the | |||||||||
| corporate headquarters that would not go away if the | |||||||||
| North branch was closed and would not go away if the | |||||||||
| South branch was closed. | |||||||||
| 5. The board of directors is considering closing the business, or | |||||||||
| atleast closing one of the branches. They have asked you to | |||||||||
| prepare an analysis and give them a recommendation. | |||||||||
| REQUIRED: | |||||||||
| 1. Prepare a segmented contribution format income statement. | Frames Corp | ||||||||
| Be sure to include rows for segment contribution margin, | Contribution Format Income Statement by Segment (as originally prepared) | ||||||||
| segment traceable fixed expenses, segment margin, and | For year ended 12/31/11 | ||||||||
| common fixed expenses. Be sure to include columns for | Total $ | Total % of sales | North $ | North % of sales | South $ | South % of sales | |||
| Total (company wide) $, Total % of sales, North $, North % of | Sales revenue | ||||||||
| sales, South $, and South % of sales. | Variable expenses | ||||||||
| Contribution margin | |||||||||
| Based upon your analysis, what recommendation would you | Traceable fixed expenses | ||||||||
| make? | Segment margin | ||||||||
| Common fixed expenses | |||||||||
| Net operating income | |||||||||
| 2. Now assume that you double check all the numbers and | Frames Corp | ||||||||
| discover that some errors in gathering the data have been | Contribution Format Income Statement by Segment (as corrected) | ||||||||
| made. Specifically, you discover that $25 of the $55 originally | For year ended 12/31/11 | ||||||||
| thought to be traceable fixed costs for the North branch are | Total $ | Total % of sales | North $ | North % of sales | South $ | South % of sales | |||
| actually common fixed costs for the company as a whole (that | Sales revenue | ||||||||
| is, costs that will not go away if the North branch is closed, or | Variable expenses | ||||||||
| if the South branch is closed. Prepare a corrected statement. | Contribution margin | ||||||||
| Traceable fixed expenses | |||||||||
| Based upon your revised analysis, what recemmendation | Segment margin | ||||||||
| would you now make? | Common fixed expenses | ||||||||
| Net operating income | |||||||||
| 3. Now that you have the number right, your board of directors | Frames Corp | ||||||||
| has asked you to give them a recommendation on whether | Contribution Format Income Statement by Segment (with new equipment at North branch) | ||||||||
| they should lease equipment which will result in additional | For year ended 12/31/11 | ||||||||
| fixed expense of $10 per year. The equipment can be put | Total $ | Total % of sales | North $ | North % of sales | South $ | South % of sales | |||
| either the North branch or the South branch. Gross sales | Sales revenue | ||||||||
| revenues are not expected to change regardless of which | Variable expenses | ||||||||
| branch gets the equipment. However, the equipment is | Contribution margin | ||||||||
| expected to result in 10% decrease in variable expenses | Traceable fixed expenses | ||||||||
| at whichever branch gets the equipment. | Segment margin | ||||||||
| Common fixed expenses | |||||||||
| Should they buy the equipment? For which branch? | Net operating income | ||||||||
| Frames Corp | |||||||||
| Contribution Format Income Statement by Segment (with new equipment at South branch) | |||||||||
| For year ended 12/31/11 | |||||||||
| Total $ | Total % of sales | North $ | North % of sales | South $ | South % of sales | ||||
| Sales revenue | |||||||||
| Variable expenses | |||||||||
| Contribution margin | |||||||||
| Traceable fixed expenses | |||||||||
| Segment margin | |||||||||
| Common fixed expenses | |||||||||
| Net operating income | |||||||||
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