ACG 2071 Lecture 14: Chapter 8 Notes Part 2
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Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal.
Mohaveâs information related to the Sand Trap line is shown below.
Segmented Income Statement for Mohaveâs | ||||||||||||||||||
Sand Trap Beach Umbrella Products | ||||||||||||||||||
Indigo | Verde | Azul | Total | |||||||||||||||
Sales revenue | $ | 60,000 | $ | 60,000 | $ | 30,000 | $ | 150,000 | ||||||||||
Variable costs | 34,000 | 31,000 | 26,000 | 91,000 | ||||||||||||||
Contribution margin | $ | 26,000 | $ | 29,000 | $ | 4,000 | $ | 59,000 | ||||||||||
Less: Direct Fixed costs | 1,900 | 2,500 | 2,000 | 6,400 | ||||||||||||||
Segment margin | $ | 24,100 | $ | 26,500 | $ | 2,000 | $ | 52,600 | ||||||||||
Common fixed costs* | 17,840 | 17,840 | 8,920 | 44,600 | ||||||||||||||
Net operating income (loss) | $ | 6,260 | $ | 8,660 | $ | (6,920 | ) | $ | 8,000 | |||||||||
*Allocated based on total sales revenue
Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.
Required:
1-a. Complete the table given below, if Mohave Corp drops the Azul line. (Do not round intermediate calculations. Round Common Fixed Costs to the nearest whole dollar.)
1-b. Will Mohaveâs net operating income increase or decrease if the Azul model is eliminated? By how much?
2. Should Mohave drop the Azul model?
3-a. Complete the table given below assuming that Mohave had no direct fixed overhead in its production information and the entire $51,000 of fixed cost was common fixed cost.
3-b. Should it the drop Azul model?
3-c. What is the increase or decrease in the net operating income of Mohave?
A small manufacturing company in Toronto, Ontario, manufacturesthree types of pumps used in a variety of applications. For manyyears the company has been profitable and has operated at capacity.However, in the last two years prices on all pumps were reduced andselling expenses increased to meet competition and keep the plantoperating at capacity. Second-quarter results for the current year,which follow, typify recent experience. |
ONTARIO PUMP COMPANY | ||||||||||||
Income Statement | ||||||||||||
Second Quarter | ||||||||||||
(in thousands) | ||||||||||||
R-Pump | F-Pump | S-Pump | Total | |||||||||
Sales | $ | 6,956 | $ | 4,674 | $ | 4,352 | $ | 15,982 | ||||
Cost of goodssold | 4,556 | 4,000 | 4,593 | 13,149 | ||||||||
Gross margin | $ | 2,400 | $ | 674 | $ | (241 | ) | $ | 2,833 | |||
Selling andadministrative expenses | 1,609 | 961 | 653 | 3,223 | ||||||||
Income beforetaxes | $ | 791 | $ | (287 | ) | $ | (894 | ) | $ | (390 | ) | |
Maria Carlo, the company'spresident, is concerned about the results of the pricing, selling,and production prices. After reviewing the second-quarter resultsshe asked her management staff to consider the following threesuggestions: |
⢠| Discontinue the S-Pump line immediately. S-Pumps would not bereturned to the product line unless the problems with the pump canbe identified and resolved. |
⢠| Increase quarterly sales promotion by $440,000 on the R-Pumpproduct line in order to increase sales volume by 15 percent. |
⢠| Cut production on the F-Pump line by 50 percent, and cut thetraceable advertising and promotion for this line to $130,000 eachquarter. |
Justin Sperry, the controller,suggested a more careful study of the financial relationships todetermine the possible effects on the companyâs operating resultsof the presidentâs proposed course of action. The president agreedand assigned JoAnn Brower, the assistant controller, to prepare ananalysis. Brower has gathered the following information. |
⢠| The unit sales prices for thethree pumps are as follows: |
R-Pump | $ | 740 | |
F-Pump | 410 | ||
S-Pump | 680 | ||
⢠| The company is manufacturing atcapacity and is selling all the pumps it produces. |
⢠| All three pumps are manufacturedwith common equipment and facilities. |
⢠| The selling and administrative expense is allocated to the threepump lines based on average sales volume over the past threeyears. |
⢠| Special selling expenses (primarily advertising, promotion, andshipping) are incurred for each pump as follows: |
Quarterly Advertising and Promotion | Shipping Expenses | |||||
R-Pump | $ | 770,000 | $ | 44 | per unit | |
F-Pump | 440,000 | 26 | per unit | |||
S-Pump | 260,000 | 100 | per unit | |||
⢠| The unit manufacturing costs forthe three pumps are as follows: |
R-Pump | F-Pump | S-Pump | |||||||
Direct material | $ | 107.00 | $ | 65.00 | $ | 164.00 | |||
Direct labor | 148.00 | 88.00 | 208.00 | ||||||
Variablemanufacturing overhead | 163.00 | 118.00 | 208.00 | ||||||
Fixed manufacturingoverhead | 66.68 | 79.88 | 137.66 | ||||||
Total | $ | 484.68 | $ | 350.88 | $ | 717.66 | |||
1. Use the operatingdata presented for Ontario Pump Company and assume that thepresident's proposed course of action had been implemented at thebeginning of the second quarter. SHOW ALL WORK. |
a. Calculate the net impact on income before taxes for each ofthe three suggestions.
b. calculate the contribution margin for S pump. c. calculate the contribution per direct-labor dollar for r pumpand f pump. |