Learning Materials
Features
Discover
Chapter 25: Q25-17RQ (page 1406)
Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.
Answer
Dropping a segment may lead to a decrease in total operating income if such a segment has a positive contribution margin.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
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?
Members of the board of directors of Security Team have received the following operating income data for the year ended March 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 300,000 | \) 330,000 | \( 630,000 |
Cost of Goods Sold: | |||
Variable | 35,000 | 42,000 | 77,000 |
Fixed | 210,000 | 63,000 | 273,000 |
Total Cost of Goods Sold | 245,000 | 105,000 | 350,000 |
Gross Pro铿乼 | 55,000 | 225,000 | 280,000 |
Selling and Administrative Expenses: | |||
Variable | 66,000 | 77,000 | 143,000 |
Fixed | 39,000 | 28,000 | 67,000 |
Total Selling and Administrative Expenses | 105,000 | 105,000 | 210,000 |
Operating Income (Loss) | \) (50,000) | \( 120,000 | \) 70,000 |
Members of the board are surprised that the industrial systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(81,000 and decrease fixed selling and administrative expenses by \)15,000.
Requirements
1. Prepare a differential analysis to show whether Security Team should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Team鈥檚 total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternatives鈥� income numbers to your answer to Requirement 1.
3. What have you learned from this comparison in Requirement 2?
What is the most common constraint faced by merchandisers?
What are sunk costs? Give an example.
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Collector-Cardz with a special order. The Hall of Fame wishes to purchase 56,000 baseball card packs for a special promotional campaign and offers \(0.38 per pack, a total of \)21,280. Collector-Cardz鈥檚 total production cost is \(0.58 per pack, as follows:
Variable costs:
Direct materials \)0.11
Direct labor 0.09
Variable overhead 0.08
Fixed overhead 0.30
Total cost \(0.58
Collector-Cardz has enough excess capacity to handle the special order.
Requirements
1. Prepare a differential analysis to determine whether Collector-Cardz should accept the special sales order.
2. Now assume that the Hall of Fame wants special hologram baseball cards. Collector-Cardz will spend \)5,700 to develop this hologram, which will be useless after the special order is completed. Should Collector-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.38 per pack?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine