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Variable Costing and Segment Reporting: Tools for Management 279 Due to the nature of the division's operations, fixed manufacturing overhead is a major element of product cost. Required: 1. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? (The basic formula for computing the required production for a period in a company is: Expected sales + Desired ending inventory Beginning inventory = Required production.) Show computations and explain your answer. Will the number of units scheduled for production affect the division's reported profit for the year? Explain. 2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on the division's net operating income. If Mr. Constantinos wants to maximize his division's net operating income for the year, how many units should be scheduled for production during the last quarter? [See the formula in (1) above.] Explain. 3. Identify the ethical issues involved in the decision Mr. Constantinos must make about the level of production for the last quarter of the year. CASE (L04] The American Association of Acupuncturists is a professional association for acupuncturists that has 10,000 members. The association operates from a central headquarters but has local chapters throughout North America. The association's monthly journal, American Acupuncture, features recent developments in the field. The association also publishes special reports and books, and it sponsors courses that qualify members for the continuing professional education credit required by state certification boards. The asso- ciation's statement of revenues and expenses for the current year is presented below: CHECK FIGURE (1) Jou segment margin: $95,000 American Association of Acupuncturists Statement of Revenues and Expenses For the Year Ended December 31 $970,000 Revenues Expenses: Salaries Occupancy costs. Distributions to local chapters Printing ....... Mailing........ Continuing education instructors' fees. General and administrative Total expenses Excess of revenues over expenses 440,000 120,000 210,000 82,000 24,000 60,000 27,000 963,000 $ 7,000 a. The board of directors of the association has requested that you construct a segmented income state- ment that shows the financial contribution of each of the association's four major programs, membership service, journal, books and reports, and continuing education. The following data have been gathered to aid you: Membership dues are $60 per year, of which $15 covers a one-year subscription to the association's journal. The other $45 pays for general membership services. b. One-year subscriptions to American Acupuncture are sold to nonmembers and libraries at $20 per subscription. A total of 1,000 of these subscriptions were sold last year. In addition to subscriptions, the journal generated $50,000 in advertising revenues. The costs per journal subscription, for members as well as nonmembers, were $4 for printing and $1 for mailing. A variety of technical reports and professional books were sold for a total of $70,000 during the year. Printing costs for these materials totaled $25,000, and mailing costs totaled $8,000. d. The association offers a number of continuing education courses. The courses generated revenues of $230,000 last year. e. Salary costs and space occupied by each program and the central staff are as follows: c. 280 Chapter 6 Salaries Space Occupied (square feet) Membership services. Journal. Books and reports Continuing education. Central staff Total $170,000 60,000 40,000 50,000 120,000 $440,000 3,000 1,000 1,000 2,000 3,000 10,000 f. The $120,000 in occupancy costs incurred last year includes $20,000 in rental cost for a portion of the warehouse used by the Membership Services program for storage purposes. The association has a flexible rental agreement that allows it to pay rent only on the warehouse space it uses. g. Printing costs other than for journal subscriptions are for books and reports related to Continuing Education. h. Distributions to local chapters are for general membership services. General and administrative expenses include costs relating to overall administration of the association as a whole. The association's central staff does some mailing of materials for general administrative purposes. j. The expenses that can be traced or assigned to the central staff, as well as any other expenses that are not traceable to the programs, will be treated as common costs. It is not necessary to distinguish between variable and fixed costs. i. Required: 1. Prepare a contribution format segmented income statement for the American Association of Acupuncturists for last year. This statement should show the segment margin for each program as well as results for the association as a whole. 2. Give arguments for and against allocating all costs of the association to the four programs. (CMA, adapted)