GREENBELT RELEVANT COSTS FOR SHORT TERM DECISIONMAKING LAB 5 Tonia and Tara have been considering expanding their operations. They have hired a cost accountant to help them analyze the cost-effectiveness of the following business opportunities and decisions: Special Order: One of T.O.T.E.S.' customers is interested in ordering a unique Christmas tote bag. Outsource the cutting department: The company's fabric supplier has offered to deliver the fabric precut, which would eliminate the cutting department. . Unprofitable segment: T.O.T.ES has three sales divisions: On-line, Product Representatives, and the Factory Store. In recent months, the Factory Store has shown an operating loss and management is considering closing the store. In this lab, students will evaluate specific short-term decisions based on the current company data and make recommendations to Tonia and Tara. SPECIAL ORDER Historically, November is a low demand month for the T.O.T.E.S. product. Consequently, the company is seeking ways to keep the production line running closer to full capacity during the month. One of T.O.T.E.S.'s top customers has asked them to produce a special tote for December. The customer is willing to pay extra for the tote. The customer wants to order 10,000 totes and will pay all freight costs. The customer wants red, glittery fabric and an additional snowflake patch attached to the tote. The fabric will cost an additional $0.40 tote, the snowflake patch wholesales at $1,000 per 10,000 patches, and sewing costs will increase by $0.15 per tote. The company has the capacity to produce these 10,000 additional totes in November and no additional equipment is required. Complete Exhibit 5-A then answer the subsequent questions. T.O.T.E.S. CASE STUDY - GREENBELT EXHIBIT 5-A: Analysis of a special order - Variable costs T.O.T.E.S. Analysis of a Special Order costs per unit Use data from the job cost card and Exhibit 2-B. Variable Cost Analysis Current DM Costs per tote $ Additional Fabric Cost per tote $ Other additional DM Costs $ Total Direct Material Cost per tote $ Current Direct Labor Cost per tote $ Additional Direct Labor Cost per tote $ Total Direct Labor Costs $ Current MOH Cost per tote $ Additional MOH Cost per tote $ Total MOH Costs per tote $ Total Variable Costs per tote $ 1) Why don't you need to take fixed costs into account for this special order? 2) What is the minimal amount T.O.T.E.S. should charge the customer for each special tote (round to the penny)? Why? T.O.T.E.S. CASE STUDY - GREENBELT 3) How much would net income change if T.O.T.E.S. accepts the special order with no increase in price per tote? (Remember T.O.T.E.S. is already a profitable company) (Round to the dollar). 4) How much would net income change if they increased the price to $5.20 for each customized tote (round to the dollar)? OUTSOURCE THE CUTTING DEPARTMENT: MAKE-BUY DECISION Scenario 1: T.O.T.E.S. fabric supplier has offered to precut the fabric to T.O.T.E.S. specifications for $0.60 per tote. The cost per yard of fabric would stay the same. The Standard Cost Card from Exhibit 2-B includes the breakout of direct labor costs. The company recently completed an Activity-Based Costing analysis that showed variable manufacturing overhead for the cutting department is $0.20 per tote. In addition, the cutting machines could be sold for $50,000. Use Exhibit 5-B-1 for your analysis. T.O.T.E.S. CASE STUDY - GREENBELT EXHIBIT 5-B-1: Scenario 1 Make-Buy Analysis Hints Exhibit 4-B T.O.T.E.S. Make-Buy Analysis Current costs can be found on Exhibit 2-B. Scenario 1: Cost per unit For 520,000 units Cost to Make Cost to Buy Outsource cutting department Direct Labor - Cutting Variable OH Costs - Cutting Only need to be concerned with the relevant costs. Sale of cutting machines Total Costs Cost per unit Scenario 1 Analysis: Based on the above information, should T.O.T.E.S. outsource the cutting department? Why or why not? T.O.T.E.S. CASE STUDY - GREENBELT T.O.T.E.S. Case Study Name: Scenario 2: IfT.O.T.E.S outsources the cutting department and sells the cutting machine, they would free up factory space for a new product that Tonia has created. Based on a market analysis, they have determined they could earn a contribution margin of $75,000 with additional fixed costs of $30,000 if they added this product line to the company. Use Exhibit 5-B-2 for your analysis. EXHIBIT 5-B-2: Scenario 2 Make-Buy Analysis T.O.T.E.S. Make-Buy Analysis Scenario 2 Hints Total Costs Total Costs from Scenario 1 Additional Contribution Margin Less Additional Fixed Costs Additional Net Oper. Income Remember: Additional income is an opportunity cost. Net cost Scenario 2 Analysis: Should T.O.T.E.S. outsource the cutting department if this additional product line is taken into consideration? Why or why not? T.O.T.E.S. CASE STUDY - GREENBELT UNPROFITABLE SEGMENT: DISCONTINUE OPERATING THE FACTORY STORE The cost accountants prepare Exhibit 5-C and present it to management each quarter. Costs are traced or allocated to each division based on sales and actual division costs. Company- wide administrative costs are allocated based on sales; advertising and marketing costs are directly traced to each division. The online sales staff and product representatives are paid on commission; whereas, the factory store sales staff are salaried and jobs would be eliminated if division was closed. For the last few years, the factory store has barely broken even and is operating at a loss. Based on the information in the most recent report, management must decide whether to keep the factory store open. After completing your analysis using Exhibit 5-C, state your recommendations. T.O.T.E.S. CASE STUDY - GREENBELT EXHIBIT 5-C: Income by sales division T.O.T.E.S. Income Statement by Sales Division Total Online Sales Product Reps Factory Store $ 1,485,000 $ 866,250 $ 123,750 $ Sales 2,475,000 Variable Costs: COGS $ 74,352 $ 1,480,400 888,030 $ 59,400 $ 518,018 $ 39,600 $ Sales Commissions $ $ 99,000 $ 537,570 $ 308,633 $ 49,398 $ 895,600 Contribution Margin Marketing, Advertising and Selling Admin. Costs $ 47,310 $ 31,540 $ 93,850 Salaries $ $ $ 12,000 15,000 $ 12,000 $ 31,888 $ 19,490) $ Allocated Admin and General Costs $ 382,650 $ 223,213 $ 637,750 Operating Income (Loss) $ 107,610 $ 53,880 $ 152,000 Analysis: Contribution Margin Avoidable Costs Projected Change in Operating Income How much will income increase or decrease) if T.O.T.E.S. closed the factory store? Should management keep the factory store open or close it? Why or why not? GREENBELT RELEVANT COSTS FOR SHORT TERM DECISIONMAKING LAB 5 Tonia and Tara have been considering expanding their operations. They have hired a cost accountant to help them analyze the cost-effectiveness of the following business opportunities and decisions: Special Order: One of T.O.T.E.S.' customers is interested in ordering a unique Christmas tote bag. Outsource the cutting department: The company's fabric supplier has offered to deliver the fabric precut, which would eliminate the cutting department. . Unprofitable segment: T.O.T.ES has three sales divisions: On-line, Product Representatives, and the Factory Store. In recent months, the Factory Store has shown an operating loss and management is considering closing the store. In this lab, students will evaluate specific short-term decisions based on the current company data and make recommendations to Tonia and Tara. SPECIAL ORDER Historically, November is a low demand month for the T.O.T.E.S. product. Consequently, the company is seeking ways to keep the production line running closer to full capacity during the month. One of T.O.T.E.S.'s top customers has asked them to produce a special tote for December. The customer is willing to pay extra for the tote. The customer wants to order 10,000 totes and will pay all freight costs. The customer wants red, glittery fabric and an additional snowflake patch attached to the tote. The fabric will cost an additional $0.40 tote, the snowflake patch wholesales at $1,000 per 10,000 patches, and sewing costs will increase by $0.15 per tote. The company has the capacity to produce these 10,000 additional totes in November and no additional equipment is required. Complete Exhibit 5-A then answer the subsequent questions. T.O.T.E.S. CASE STUDY - GREENBELT EXHIBIT 5-A: Analysis of a special order - Variable costs T.O.T.E.S. Analysis of a Special Order costs per unit Use data from the job cost card and Exhibit 2-B. Variable Cost Analysis Current DM Costs per tote $ Additional Fabric Cost per tote $ Other additional DM Costs $ Total Direct Material Cost per tote $ Current Direct Labor Cost per tote $ Additional Direct Labor Cost per tote $ Total Direct Labor Costs $ Current MOH Cost per tote $ Additional MOH Cost per tote $ Total MOH Costs per tote $ Total Variable Costs per tote $ 1) Why don't you need to take fixed costs into account for this special order? 2) What is the minimal amount T.O.T.E.S. should charge the customer for each special tote (round to the penny)? Why? T.O.T.E.S. CASE STUDY - GREENBELT 3) How much would net income change if T.O.T.E.S. accepts the special order with no increase in price per tote? (Remember T.O.T.E.S. is already a profitable company) (Round to the dollar). 4) How much would net income change if they increased the price to $5.20 for each customized tote (round to the dollar)? OUTSOURCE THE CUTTING DEPARTMENT: MAKE-BUY DECISION Scenario 1: T.O.T.E.S. fabric supplier has offered to precut the fabric to T.O.T.E.S. specifications for $0.60 per tote. The cost per yard of fabric would stay the same. The Standard Cost Card from Exhibit 2-B includes the breakout of direct labor costs. The company recently completed an Activity-Based Costing analysis that showed variable manufacturing overhead for the cutting department is $0.20 per tote. In addition, the cutting machines could be sold for $50,000. Use Exhibit 5-B-1 for your analysis. T.O.T.E.S. CASE STUDY - GREENBELT EXHIBIT 5-B-1: Scenario 1 Make-Buy Analysis Hints Exhibit 4-B T.O.T.E.S. Make-Buy Analysis Current costs can be found on Exhibit 2-B. Scenario 1: Cost per unit For 520,000 units Cost to Make Cost to Buy Outsource cutting department Direct Labor - Cutting Variable OH Costs - Cutting Only need to be concerned with the relevant costs. Sale of cutting machines Total Costs Cost per unit Scenario 1 Analysis: Based on the above information, should T.O.T.E.S. outsource the cutting department? Why or why not? T.O.T.E.S. CASE STUDY - GREENBELT T.O.T.E.S. Case Study Name: Scenario 2: IfT.O.T.E.S outsources the cutting department and sells the cutting machine, they would free up factory space for a new product that Tonia has created. Based on a market analysis, they have determined they could earn a contribution margin of $75,000 with additional fixed costs of $30,000 if they added this product line to the company. Use Exhibit 5-B-2 for your analysis. EXHIBIT 5-B-2: Scenario 2 Make-Buy Analysis T.O.T.E.S. Make-Buy Analysis Scenario 2 Hints Total Costs Total Costs from Scenario 1 Additional Contribution Margin Less Additional Fixed Costs Additional Net Oper. Income Remember: Additional income is an opportunity cost. Net cost Scenario 2 Analysis: Should T.O.T.E.S. outsource the cutting department if this additional product line is taken into consideration? Why or why not? T.O.T.E.S. CASE STUDY - GREENBELT UNPROFITABLE SEGMENT: DISCONTINUE OPERATING THE FACTORY STORE The cost accountants prepare Exhibit 5-C and present it to management each quarter. Costs are traced or allocated to each division based on sales and actual division costs. Company- wide administrative costs are allocated based on sales; advertising and marketing costs are directly traced to each division. The online sales staff and product representatives are paid on commission; whereas, the factory store sales staff are salaried and jobs would be eliminated if division was closed. For the last few years, the factory store has barely broken even and is operating at a loss. Based on the information in the most recent report, management must decide whether to keep the factory store open. After completing your analysis using Exhibit 5-C, state your recommendations. T.O.T.E.S. CASE STUDY - GREENBELT EXHIBIT 5-C: Income by sales division T.O.T.E.S. Income Statement by Sales Division Total Online Sales Product Reps Factory Store $ 1,485,000 $ 866,250 $ 123,750 $ Sales 2,475,000 Variable Costs: COGS $ 74,352 $ 1,480,400 888,030 $ 59,400 $ 518,018 $ 39,600 $ Sales Commissions $ $ 99,000 $ 537,570 $ 308,633 $ 49,398 $ 895,600 Contribution Margin Marketing, Advertising and Selling Admin. Costs $ 47,310 $ 31,540 $ 93,850 Salaries $ $ $ 12,000 15,000 $ 12,000 $ 31,888 $ 19,490) $ Allocated Admin and General Costs $ 382,650 $ 223,213 $ 637,750 Operating Income (Loss) $ 107,610 $ 53,880 $ 152,000 Analysis: Contribution Margin Avoidable Costs Projected Change in Operating Income How much will income increase or decrease) if T.O.T.E.S. closed the factory store? Should management keep the factory store open or close it? Why or why not