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Chapter 21: Problem 4

From the following list of activity bases for an automobile dealership, select the base that would be most appropriate for each of these costs: (1) preparation costs (cleaning, oil, and gasoline costs) for each car received, (2) salespersons' commission of \(4 \%\) of the sales price for each car sold, and (3) administrative costs for ordering cars. a. Dollar amount of cars sold e. Dollar amount of cars ordered b. Number of cars received f. Dollar amount of cars received c. Dollar amount of cars on hand g. Number of cars ordered d. Number of cars on hand h. Number of cars sold

Short Answer

Expert verified
1) b, 2) a, 3) g.

Step by step solution

01

Identify Activity Bases

Examine each potential activity base (a through h) given in the problem statement: (a) Dollar amount of cars sold, (b) Number of cars received, (c) Dollar amount of cars on hand, (d) Number of cars on hand, (e) Dollar amount of cars ordered, (f) Dollar amount of cars received, (g) Number of cars ordered, (h) Number of cars sold.
02

Preparation Costs Analysis

Preparation costs involve cleaning, oil, and gasoline for each car received. These costs are best associated with the number of cars received. Hence, for preparation costs, the activity base should be (b) Number of cars received.
03

Salespersons' Commission Analysis

Commissions are typically calculated as a percentage of the sales price. Therefore, salespersons' commission is best tracked using the activity base that reflects the dollar amount of the sales. Thus, for this cost, the activity base should be (a) Dollar amount of cars sold.
04

Administrative Costs Analysis

Administrative costs for ordering cars are better explained by the activity base that reflects the operational aspect of this process. Therefore, the most appropriate base would be (g) Number of cars ordered, as it relates directly to the administrative process of ordering.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Preparation Costs
Preparation costs comprise essential expenses involved in readying a vehicle for sale, which include cleaning, adding oil, and fueling the car. These activities are directly impacted when a new car is received by a dealership. Thus, the most logical activity base to associate with preparation costs is "the number of cars received." By using this base:
  • We can accurately track the quantity and associated costs, as each new vehicle requires preparation.
  • This helps in determining the total expenditure on preparation for accounting purposes.
When the number of cars received increases, preparation costs will increase proportionally, making this base a reliable indicator of incurred costs.
Sales Commissions
Sales commissions in an automobile dealership are expenses paid to salespeople as a reward for selling cars. Typically, these are calculated as a percentage of the sales price of the cars sold, thus incentivizing the sales staff to maximize sales revenue. The activity base for sales commissions is most appropriately linked to the "dollar amount of cars sold."
  • This provides a direct reflection of sales performance and commission expense.
  • It ensures that sales associates are motivated, as higher sales directly correlate to higher commissions.
By aligning this cost with the sales revenue, the dealership can accurately allocate resources towards its incentive structure and track performance effectively.
Administrative Costs
Administrative costs related to car ordering encompass all operational expenses necessary to bring vehicles into inventory. This includes processes like paperwork, procurement, and coordination tasks. The "number of cars ordered" serves as the most suitable activity base for these costs.
  • This base is effective as it correlates directly with the administrative workload generated by ordering.
  • It helps in planning and budgeting administrative resources based on ordering volume.
By leveraging this base, dealerships can monitor and manage their administrative expenses more effectively, ensuring efficient operations in vehicle procurement.
Automobile Dealership Activity Bases
Activity bases in automobile dealerships are important for identifying how costs relate to specific activities. Choosing the correct activity base is crucial for effective cost management and operational efficiency.
  • Using the right base helps in tracking costs accurately, allowing the dealership to allocate resources better and control expenses.
  • Activity bases can be various metrics like the number of cars received, sold, or ordered, and the dollar amount of sales or operational activities.
By understanding and implementing the correct activity bases, dealerships can better align their financial and operational strategies, ultimately contributing to improved profit margins and cost control.

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Most popular questions from this chapter

For a recent year, McDonald's company-owned restaurants had the following sales and expenses (in millions): \begin{tabular}{lr} Sales & \(\frac{\$ 16,083}{\$ 5,350}\) \\ Food and packaging & 4,185 \\ Payroll & 4,006 \\ Occupancy (rent, depreciation, etc.) & 2,340 \\ General, selling, and administrative expenses & \(\$ 15,881\) \\ \hline Income from operations & \(\$ 202\) \\ \hline \end{tabular} Assume that the variable costs consist of food and packaging, payroll, and \(40 \%\) of the general, selling, and administrative expenses. a. What is McDonald's contribution margin? Round to the nearest million. b. What is McDonald's contribution margin ratio? Round to one decimal place. c. How much would income from operations increase if same-store sales increased by \(\$ 500\) million for the coming year, with no change in the contribution margin ratio or fixed costs?

The Dash Club of Tampa, Florida, collected recipes from members and published a cookbook entitled Life of the Party. The book will sell for \(\$ 25\) per copy. The chairwoman of the cookbook development committee estimated that the club needed to sell 10,000 books to break even on its \(\$ 90,000\) investment. What is the variable cost per unit assumed in the Dash Club's analysis?

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a. Bert Company budgets sales of \(\$ 1,250,000\), fixed costs of \(\$ 450,000\), and variable costs of \(\$ 200,000\). What is the contribution margin ratio for Bert Company? b. If the contribution margin ratio for Ernie Company is \(40 \%\), sales were \(\$ 750,000\), and fixed costs were \(\$ 225,000\), what was the income from operations?

Media outlets such as ESPN and Fox Sports often have Web sites that provide in-depth coverage of news and events. Portions of these Web sites are restricted to members who pay a monthly subscription to gain access to exclusive news and commentary. These Web sites typically offer a free trial period to introduce viewers to the Web site. Assume that during a recent fiscal year, ESPN.com spent \(\$ 1,800,000\) on a promotional campaign for the ESPN.com Web site that offered two free months of service for new subscribers. In addition, assume the following information: \(\begin{array}{ll}\text { Number of months an average new customer stays with the } & \\ \text { service (including the two free months) } & 25 \text { months } \\ \text { Revenue per month per customer subscription } & \$ 10.00 \\\ \text { Variable cost per month per customer subscription } & \$ 2.00\end{array}\) Determine the number of new customer accounts needed to break even on the cost of the promotional campaign. In forming your answer, (1) treat the cost of the promotional campaign as a fixed cost, and (2) treat the revenue less variable cost per account for the subscription period as the unit contribution margin.
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