Carpets Unlimited produces and sells three lines of carpet: economy, standard, a
ID: 2381077 • Letter: C
Question
Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company, has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet.Economy Standard Deluxe Total Yards of carpet
26,400 39,600 66,000 132,000 Sales
$326,000 $702,000 $1,547,200 $2,575,200 Less variable costs (dye, yarn, labor, etc.) 176,700 423,200 900,600 1,500,500 Less fixed costs (depreciation,
supervisory salaries, etc.) 160,400 240,600 401,000 802,000 Profit (loss) $(11,100) $38,200 $245,600 $272,700
Upon seeing the report, Matt Williams, the president of Carpets Unlimited, suggested that the company should consider dropping the economy grade and concentrate on the two other lines. Jeff replied, however, that that would lead to the cost allocation death spiral.
Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company, has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet.
Economy Standard Deluxe Total Yards of carpet
26,400 39,600 66,000 132,000 Sales
$326,000 $702,000 $1,547,200 $2,575,200 Less variable costs (dye, yarn, labor, etc.) 176,700 423,200 900,600 1,500,500 Less fixed costs (depreciation,
supervisory salaries, etc.) 160,400 240,600 401,000 802,000 Profit (loss) $(11,100) $38,200 $245,600 $272,700
Upon seeing the report, Matt Williams, the president of Carpets Unlimited, suggested that the company should consider dropping the economy grade and concentrate on the two other lines. Jeff replied, however, that that would lead to the cost allocation death spiral.
Problem 7-12 Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company, has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet.
Economy Standard Deluxe Total Yards of carpet
26,400 39,600 66,000 132,000 Sales
$326,000 $702,000 $1,547,200 $2,575,200 Less variable costs (dye, yarn, labor, etc.) 176,700 423,200 900,600 1,500,500 Less fixed costs (depreciation,
supervisory salaries, etc.) 160,400 240,600 401,000 802,000 Profit (loss) $(11,100) $38,200 $245,600 $272,700
Upon seeing the report, Matt Williams, the president of Carpets Unlimited, suggested that the company should consider dropping the economy grade and concentrate on the two other lines. Jeff replied, however, that that would lead to the cost allocation death spiral.
Carpets Unlimited produces and sells three lines of carpet: economy, standard, and deluxe. Jeff Choi, the chief financial officer of the company, has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet. Upon seeing the report, Matt Williams, the president of Carpets Unlimited, suggested that the company should consider dropping the economy grade and concentrate on the two other lines. Jeff replied, however, that that would lead to the cost allocation death spiral. Revise the report assuming the company drops the economy grade. If either the standard or the deluxe grades is reporting a loss in part a, revise the report assuming that it is also dropped.
Explanation / Answer
Hi,
Please find the answer as follows:
Part A:
Part B:
Notes:
Allocation of Fixed Cost (Economy) under Part A would take place as follows:
Standard = Total Fixed Cost*Standard Fixed Cost/(Standard Fixed Cost + Deluxe Fixed Cost) = 802000*240600/(240600 + 401000) = 300750
Deluxe = Total Fixed Cost*Deluxe Fixed Cost/(Standard Fixed Cost + Deluxe Fixed Cost) = 802000*401000/(240600 + 401000) = 501250
Thanks.
Standard Deluxe Total Yards of carpet 39600 66000 105600 Sales 702000 1547200 2249200 Less Variable Costs 423200 900600 1323800 Less Fixed Costs 300750 501250 802000 Profit/Loss -21950 145350 123400