AP7-2 (a,b) Incremental Analysis of Outsourcing Decision [LO 1, 2, 4] Oakland Co
ID: 2348472 • Letter: A
Question
AP7-2 (a,b)Incremental Analysis of Outsourcing Decision [LO 1, 2, 4]
Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $304,100 per year. Highline states that its bid will cover all services and planting materials required to "keep Oakland's grounds in a condition comparable to prior years." Oakland's cost for grounds maintenance in the preceding year were $313,040 as follows:
Salary of three full-time gardeners $195,530
Plant materials 85,990
Fertilizer 8,150
Fuel 9,130
Depreciation of tractor, mowers, and other
miscellaneous equipment 14,240
Total $313,040
If Oakland College outsources maintenance, it will be able to sell equipment for $31,230, and the three gardeners will be laid off.
Analyze the one-year financial impact of outsourcing grounds maintenance.
$ ___________________
How will savings in the second year differ from those in year 1?
$ _____________ Increase or Decrease
AP7-9 (a)
Dropping a Product Line [LO 1, 2, 4]
Pantheon Gaming, a computer enhancement company, has three product lines: audio enhancers, video enhancers, and connection-speed accelerators. Common costs are allocated based on relative sales. A product line income statement follows:
Pantheon Gaming
Income Statement
For the Year Ended December 31, 2011
Audio Video Accelerators Total
Sales $1,045,000 $2,255,000 $2,200,000 $5,500,000
Less cost of goods sold 575,000
1,240,000
1,870,000
3,685,000
Gross margin 470,000 1,015,000 330,000 1,815,000
Less other variable costs 57,400
73,900
21,400
152,700
Contribution margin 412,600 941,100 308,600 1,662,300
Less direct salaries 156,400 175,700 66,900 399,000
Less common fixed costs:
Rent 11,970 25,830 25,200 63,000
Utilities 4,370 9,430 9,200 23,000
Depreciation 5,890 12,710 12,400 31,000
Other administrative costs 79,230 170,970
166,800
417,000
Net income $154,740
$546,460
$28,100
$729,300
Since the profit for accelerator devices is relatively low, the company is considering dropping this product line.
Determine the impact on profit of dropping accelerator products.
$ __________ Worse off or Better Off
Explanation / Answer
Not Outsource
Outsource
Net income (incease or decrease)
Salaray - gardeners
195530
0
195530
Plant materials
85990
0
85990
Fertilizer
8150
0
8150
Fuel
9130
0
9130
Misc. Equip
14240
0
14240
Outsource cost
0
304100
-304100
Sale of equipment
0
31230
31230
Total
313040
272870
40170
1st year Savings of 40,170 or Net income will increase by 40,170.
Second year: Won’t have the 31230 from the sale – so savings will decrease by 31230 2nd year.
Continue
Eliminate
Net Income (increase or decrease)
Contribution Margin
308,600
0
-308,600
Direct Salaries
66900
0
66900
Total
241,700
0
-241,700
Impact is 241,700 worse off
Not Outsource
Outsource
Net income (incease or decrease)
Salaray - gardeners
195530
0
195530
Plant materials
85990
0
85990
Fertilizer
8150
0
8150
Fuel
9130
0
9130
Misc. Equip
14240
0
14240
Outsource cost
0
304100
-304100
Sale of equipment
0
31230
31230
Total
313040
272870
40170