Figure 2: Inventory Data for the First Quarter You discovered in one of your previous analyses that a large portion of Muesli AG's production costs are fixed. You believe then, that variable costing may provide your manager with more accurate net income data to calculate performance bonuses. You will research the differences between absorption costing and variable costing in your first analysis, "Analysis 1 ". In Analysis 2, you will examine the segmented financials for the three market segments, North, South, and West, to make a recommendation as to whether the company should continue to sell in the West market. The segmented financials are shown in the following figure. Common fixed expenses are allocated evenly between the three markets. Insert formulas and cet rederences into the "sols seis beiow. Instructions: Use formulas and links to cells in the worksheet provided in order to answer the following questions. There are two worksheets in the workbook, one for each analysis. Analysis 1 - Absorption Costing compared to Variable Costing 1. What is Muesli AG's product cost per unit using absorption costing? 2. What is Muesli AG's product cost per unit using variable costing? 3. Complete the Contribution Margin Income Statement to determine net income under variable costing. 4. Explain why the net income is different under absorption costing and variable costing. 5. What happens if you change production to match sales? Change production quantities to 200,000 for each month? Can you explain how and why the comparison of income between absorption and variable costing has changed? Analysis 2 The segmented financial statements in Figure 3 are provided in an Excel spreadsheet. Your task is to reformat the segmented financials to more accurately reflect performance in the North, South, and West markets. Use formulas and links to cells to create your new segmented financial statement "Version 2". 6. What is the segment margin for each of the three divisions? 7. What is the net income for Muesli AG for the quarter? Is this amount different than in the first version of the segmented report? 8. What is your recommendation regarding discontinuing sales in the West market? Explain. Introduction Muesli AG uses absorption costing to report its cost of goods in the financial statements. The resulting financial statements are used to evaluate the company as a whole. Segmented financial statements are used to evaluate market segments and manager performance. Net profit is one of the key factors in the Company Valuation ratio used to evaluate the company overall. You can see that formula below. The Discounting Risk Rate is a combination of the amount of debt the company holds and capital expenditures. (Capital expenditures are investment in long term assets such as machinery and buildings.) The only ways to improve Company Valuation then, are to improve Net Income or reduce the Discounting Risk Rate. For now, we wish to focus on net income. Company Valuation = Annual Profit / Discounting Risk Rate Annual Profit = Cumulative Net Income Problem Statement: Case Details Your manager has been with Muesli AG for many years. She is responsible for approving quarterly performance bonuses. As with the overall company valuation, managers are also evaluated based on net income. To be sure that bonuses are correctly awarded, she would like some additional analysis done. She has made the following observations that she would like you to explore: 1. Although the process to produce a box of muesli does not change significantly from time period to time period, the costs reported on the financial statements have varied during those time periods, thus affecting cost of goods sold and net income. 2. Based on the segmented financial statement distributed to managers, it appears that the market in the West is underperforming and the company should consider discontinuing sales in that region. Your job then, is to examine each of these situations and report back to your manager. The following are the financial data for first quarter of the year
