Managerial Accounting - Chapter 12 Differential Analysis: The Key to Decision Making

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $48 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: 14,100 Units Per Year Per Unit Direct materials Direct labor Variable manufacturin g overhead Fixed manufacturin g overhead, traceable Fixed manufacturin g overhead, allocated Total cost $ $ 13 $ 183,300 15 211,500 4 56,400 9* 126,900 17 239,700 58 $ 817,800 *40% supervisory salaries; 60% depreciation of special equipment (no resale value). Required: 1a. Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) 1b. Should the outside supplier's offer be accepted? Accept Reject 2a. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $193,840 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.) 2b. Should Troy Engines, Ltd., accept the offer to buy the carburetors for $48 per unit? Reject Accept Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $96,000 per quarter. The company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows: Product A B C Quarterly Output 11,000 pounds 16,000 pounds 5,000 gallons Selling Price $ 5 per pound $ 6 per pound $ 13 per gallon Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Product A B C Additional Processing Costs $ 38,000 $ 38,000 $ 12,000 Selling Price $ 7 per pound $ 10 per pound $ 16 per gallon Required: a. Compute the incremental profit (loss) for each product. b. Which product or products should be sold at the split-off point? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.) Product A Product B Product C c. Which product or products should be processed further? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.) Product A Product B Product C Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (120 seats 40% occupancy $ 3,600 100% $75 ticket price) Variable expenses ($14.00 per person) 672 Contribution margin Flight expenses: Salaries, flight crew Flight promotion Depreciati on of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination 2,928 $ 81.3% 330 700 470 185 210 740 180 60 Total flight expenses Net operating loss 18.7 2,875 $ (53) The following additional information is available about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete. b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decision to drop flight 482. c. The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses. d. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight. e. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. f. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll. Required: 1. Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Loss amounts should be indicated by a minus sign.) Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below: Sales Cost of goods sold Superior Markets, Inc. Income Statement For the Quarter Ended September 30 North South Total Store Store 760,00 $3,800,000 $ $1,520,000 0 420,00 2,090,000 834,000 0 Gross margin 1,710,000 340,00 0 East Store $1,520,000 836,000 686,000 684,000 319,000 274,600 162,900 146,100 481,900 420,700 $ (13,400) $ 204,100 $ 263,300 Selling and administrative expenses: Selling expenses: 833,000 Administrative expenses 423,000 Total expenses Net operating income (loss) 1,256,000 $ 454,000 239,40 0 114,00 0 353,40 0 The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use: a. The breakdown of the selling and administrative expenses is as follows: Total North Store South Store East Store Selling expenses: Sales salaries Direct advertising General advertising* Store rent Depreciation of store fixtures Delivery salaries Depreciation of delivery equipment $248,200 173,000 57,000 300,000 20,000 23,400 11,400 $ 59,000 59,000 11,400 93,000 5,400 7,800 3,800 $ 87,800 80,000 22,800 110,000 6,800 7,800 3,800 $101,400 34,000 22,800 97,000 7,800 7,800 3,800 $833,000 $239,400 $319,000 $274,600 Total North Store South Store East Store Administrative expenses: Store management salaries General office salaries* Insurance on fixtures and inventory Utilities Employment taxes General office other* $ 82,000 57,000 33,000 94,410 61,590 95,000 $ 25,000 11,400 9,900 33,220 15,480 19,000 $ 34,000 22,800 13,000 32,240 22,860 38,000 $ 23,000 22,800 10,100 28,950 23,250 38,000 Total administrative expenses $423,000 $114,000 $162,900 $146,100 Total selling expenses *Allocated on the basis of sales dollars. *Allocated on the basis of sales dollars. b. The lease on the building housing the North Store can be broken with no penalty. c. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed. d. The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $10,400 per quarter. The general manager of the North Store would be retained at her normal salary of $11,400 per quarter. All other employees in the store would be discharged. e. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person's salary is $4,800 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete. f. The company's employment taxes are 15% of salaries. g. One-third of the insurance in the North Store is on the store's fixtures. h. The \"General office salaries\" and \"General officeother\" relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person's compensation is $5,700 per quarter. Required: 1. Prepare a schedule showing the change in revenues and expenses and the impact on the company's overall net operating income that would result if the North Store were closed. (Any losses/ reductions should be indicated by a minus sign.) 2. Based on your computations in (1) above, what recommendation would you make to the management of Superior Markets, Inc.? The North Store should be closed. The North Store should not be closed. 3. Assume that if the North Store were closed, at least one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. The East Store has enough capacity to handle the increased sales. You may assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in that store. a. Calculate the net advantage of closing the North Store. (Any reductions or outflows should be indicated by a minus sign.) b. What recommendation would you make to the management of Superior Markets, Inc.? The North Store should be closed. The North Store should not be closed. rev: 09_13_2014_QC_52212, 10_16_2014_QC_ e Regal Cycle Company manufactures three types of bicyclesa dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Sales Variable manufactu ring and selling expenses Contribut ion margin Fixed expenses: Adverti sing, traceable $ Total 923,000 Dirt Bikes $ 269,000 Mountain Bikes $ 403,000 Racing Bikes $ 251,000 465,000 116,000 198,000 151,000 458,000 153,000 205,000 100,000 69,900 8,500 40,500 20,900 Depreci ation of special equipment Salarie s of productline managers Allocate d common fixed expenses* 43,300 20,800 7,200 15,300 114,800 40,100 38,400 36,300 184,600 53,800 80,600 50,200 Total fixed expenses 412,600 123,200 166,700 122,700 Net operating income (loss) $ 45,400 $ 29,800 $ 38,300 $ (22,700) *Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: 1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) 1b. Should production and sale of the racing bikes be discontinued? Yes No 2a. Prepare a segmented income statement. 2b. Would a segmented income statement format be more usable to management in assessing the longrun profitability of the various product lines. Yes No