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Chapter 25: Q16E (page 1413)

Moore Company sells both designer and moderately priced fashion accessories. Top management is deciding which product line to emphasize. Accountants have provided the following data:

Per Item

Designer Moderately Priced

Average sales price \(185 \)87

Average variable costs 105 22

Average contribution margin 80 65

Average fixed costs (allocated) 20 10

Average operating income \(60 \)55

The Moore Company store in Grand Junction, Colorado, has 14,000 square feet of floor space. If Moore Company emphasizes moderately priced goods, it can display 840 items in the store. If Moore Company emphasizes designer wear, it can display only 560 designer items. These numbers are also the average monthly sales in units.

Prepare an analysis to show which product the company should emphasize.

Short Answer

Expert verified

The company should emphasize on moderately priced productsforprofit maximization.

Step by step solution

01

Meaning of Management

In business terms, a management refers to an authority responsible for managing and controlling theactivities of an entity and itshuman assets.A management has the authority to developpolicies and strategiesfor abusiness entity and also drafts decisions.

02

Preparation of an analysis

Particulars

Designer ($)

Moderately Priced ($)

Units displayed per square foot:

Designer

(560/14,000)=0.04

(840/14,000)=0.06

Contribution margin per unit

80

65

Contribution margin per square foot of display space

(80*0.04)=3.20

(65*0.06)=3.90

Capacity square foot of display space

14,000

14,000

Total contribution margin at capacity

(14,000*3.20)=44,800

(14,000*3.90)=54,600

The company should emphasize on moderately priced productsbecause it will provide a higher contribution margin.

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Most popular questions from this chapter

NaturalMaid processes organic milk into plain yogurt. NaturalMaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of \(840, yields 300 gallons of plain yogurt. NaturalMaid sells the one-gallon tubs for \)5 each and spends \(0.14 for each plastic tub. NaturalMaid has recently begun to reconsider its strategy. NaturalMaid wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. NaturalMaid could further process each batch of plain yogurt into 6,400 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product exists. NaturalMaid would sell each individual portion for \)0.58. Packaging would cost \(0.10 per portion, and fruit would cost \)0.11 per portion. Fixed costs would not change.

Should NaturalMaid continue to sell only the gallon-size plain yogurt (sell as is) or convert the plain yogurt into individual-size portions of fruited yogurt (process further)? Why?

Green Thumb operates a commercial plant nursery, where it propagates plants for garden centers throughout the region. Green Thumb has \(5,300,000 in assets. Its yearly fixed costs are \)625,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total \(1.70. Green Thumb鈥檚 volume is currently 490,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.00 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.

Requirements

1. Green Thumb鈥檚 owners want to earn an 10% return on the company鈥檚 assets. What is Green Thumb鈥檚 target full product cost?

2. Given Green Thumb鈥檚 current costs, will its owners be able to achieve their target profit?

3. Assume Green Thumb has identified ways to cut its variable costs to \(1.55 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Green Thumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Green Thumb does not expect volume to be affected, but it hopes to gain more control over pricing. If Green Thumb has to spend \)135,000 this year to advertise and its variable costs continue to be $1.55 per unit, what will its cost-plus price be? Do you think Green Thumb will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

MCCOLLUM COMPANY

Income Statement

Month Ended June 30, 2018

Total Product A Product B

Net Sales Revenue \(150,000 \)75,000 \(75,000

Variable Costs 90,000 55,000 35,000

Contribution Margin 60,000 20,000 40,000

Fixed Costs 50,000 5,000 45,000

Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)

  1. If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
  2. If 50% of Product B鈥檚 fixed costs are avoidable, should McCollum drop Product B? Why or why not?

What is the decision rule concerning products to emphasize when facing a constraint?

Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Daniels鈥檚 liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs \(9,500 per year to lease. FMS offers to manage this fleet for an annual fee of \)300,000. Smiley performed the following analysis:

Retain in-house Outsource to FMS Difference

Annual leasing fee for \(9,500 \)9,500

Software

Annual maintenance of

Trucks 147,000 147,000

Total annual salaries of

Five laid-off employees 185,000 185,000

Fleet management

Service鈥檚 annual fee \(300,000 (300,000)

Total differential cost of

Outsourcing \)341,500 \(300,000 \)41,500

Requirements

1. Which alternative will maximize Daniels鈥檚 short-term operating income?

2. What qualitative factors should Daniels consider before making a final decision?
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