Members of the board of directors of Safety Step have receivedthe following operating income data for the year ended May 31,2012:
Safety Step
income statement
For the year ended May 31, 2012
Sales Revenue: Product line industrial systems ($350000),product line household systems ($360,000), total ($710,000)
cost of goods sold:
variable: product line industrial systems (34000), product linehousehold systems (47,000), total (81,000)
fixed: product line industrial systems (230,000), product linehousehold systems (69,000), total (299,000)
total cost of goods sold: product line industrial systems($264000), product line household systems(116,000), total(380000)
gross profit: product line industrial systems ($86,000), productline household systems (244,000), total (330,000)
marketing and administrative expenses:
variable: product line industrial systems (69,000), product linehousehold systems (76,000), total (145000)
fixed: product line industrial systems (41000), product linehousehold systems (24,000), total (65,000)
total marketing administrative exp.: product line industrialsystems (110,000), product line household systems (100,000),Total($210,000)
operating income (loss): product line industrial systems(-$24,000), product line household systems ($144,000), total$120,000
Members of the board are surprised that the industrial systemsproduct line is losing money. They commission a study to determinewhether the company should drop the line. Company accountantsestimate that dropping industrial systems will decrease fixed costof goods sold by $81,000 and decrease fixed marketing andadministrative expenses by $14,000.
1. prepare an incremental analysis to show whether Safety Stepshould drop the industrial systems product line. fill in theblanks.
Safety Step
incremental analysis of dropping a product line
expected decrease in revenues--
dropping industrial systems sales ________
expected decrease in expenses:
variable expenses:
cost of goods sold ________
marketing and administrative expenses _________
fixed expenses:
cost of goods sold _________
marketing and administrative expenses __________
expected decrease in total expenses __________
__________(expected decrease or expected increase) in operatingincome _____________
2. Prepare contribution margin income statements to show SafetyStep's total operating income under the two alternatives: (a) withthe industrial systems line and (b) without the line . Compare thedifference between the two alternatives' income numbers to youranswer to requirement 1.
3. What have you learned from the comparison in requirement2?
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Naturalmaid processes organic milk into plain yogurt.Naturalmaid sells plain yogurt to hospitals, nursing homes, andrestaurants in bulk, one-gallon containers. Each batch, processedat a cost of $880, yields 900 gallons of plain yogurt. Naturalmaidsells the one-gallon tubs for $6 each, and spends $0.16 for eachplastic tub. Naturalmaid has recently begun to reconsider itsstrategy. Naturalmaid wonders if it would be more profitable tosell individual-size portions of fruited organic yogurt at localfood stores. Naturalmaid could further process each batch of plainyogurt into 19200 individual portions (3/4 cup each) of fruitedyogurt. A recent market analysis indicates that demand for theproduct exists. Naturalmaid would sell each individual portion for$0.54. Packaging would cost $0.07 per portion, and fruit would cost$0.10 per portion. Fixed costs would not change.
a)Should naturalmaid continue to sell only the gallon- sizeplain yogurt (sell as is) , or convert the plain yogurt intoindividual- size portions of fruited yogurt (process further)? why?
calculate the net benefit per batch under each alternative. (Foraccounts with a $0 balance, make sure to enter $0 in theappropriate column.) Fill in the blanks.
Sales revenue per unit: sell as gallon-size containers_______,sell as individual portions ______
extra processing costs per unit- packaging: sell as gallon-sizecontainers______, sell as individual portions_______
extra processing costs per unit- adding fruit: sell asgallon-size containers_____, sell as individualportions________
net benefit per unit: sell as gallon-size containers_______,sell as individual portions_______
number of units produced per batch: sell as gallon-sizecontainers *_______, sell as individual portions*________
net benefit per batch: sell as gallon-size containers___________, sell as individual portions ___________
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San Jose sunglasses sell for about $154 per pair. Suppose thatthe company incurs the following average costs per pair:
direct materials: $41
direct labor: $13
variable manufacturing overhead: $10
variable marketing expenses: $2
fixed manufacturing overhead: $20
total cost: $86
*$2,350,000 total fixed manufacturing overhead/ 117,500 pairs ofsunglasses
San Jose has enough idle capacity to accept a one-time-onlyspecial order from Washington Shades for 23,000 pairs of sunglassesat $79 per pair. San Jose will not incur an variable marketingexpenses for the order.
a. How would accepting the order affect San Jose's Sunglassesoperating income? In addition to the special oder's effect onprofits, what other (longer-term, qualitative) factors should SanJose's Sunglasses managers consider in deciding whether to acceptthe order? Prepare the analysis to determine the effect onoperating income. Fill in the blanks
San Jose
Incremental Analysis of Special Sales Order
expected increase in revenues ________ sunglasses *_________________
expected increase in expenses ________sunglasses*_________________
expected _________ in operating income __________
b. San Jose's marketing manager, Peter Bing, argues againstaccepting the special order because the offer price of $79 is lessthan San Jose's $86 cost to make the sunglasses. Bing asks you, asone of San Jose's staff accountants, to explain whether hisanalysis is correct.
