Members of the board of directors of Safety Step have received the following ope
ID: 2421130 • Letter: M
Question
Members of the board of directors of Safety Step have received the 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 line household systems (47,000), total (81,000)
fixed: product line industrial systems (230,000), product line household 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), product line household systems (244,000), total (330,000)
marketing and administrative expenses:
variable: product line industrial systems (69,000), product line household systems (76,000), total (145000)
fixed: product line industrial systems (41000), product line household systems (24,000), total (65,000)
total marketing administrative exp.: product line industrial systems (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 systems product line is losing money. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $81,000 and decrease fixed marketing and administrative expenses by $14,000.
1. prepare an incremental analysis to show whether Safety Step should drop the industrial systems product line. fill in the blanks.
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 operating income _____________
2. Prepare contribution margin income statements to show Safety Step's total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line . Compare the difference between the two alternatives' income numbers to your answer to requirement 1.
3. What have you learned from the comparison in requirement 2?
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Naturalmaid processes organic milk into plain yogurt. Naturalmaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of $880, yields 900 gallons of plain yogurt. Naturalmaid sells the one-gallon tubs for $6 each, and spends $0.16 for each plastic tub. Naturalmaid has recently begun to reconsider its strategy. Naturalmaid wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. Naturalmaid could further process each batch of plain yogurt into 19200 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product 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- size plain yogurt (sell as is) , or convert the plain yogurt into individual- size portions of fruited yogurt (process further)? why ?
calculate the net benefit per batch under each alternative. (For accounts with a $0 balance, make sure to enter $0 in the appropriate 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-size containers______, sell as individual portions_______
extra processing costs per unit- adding fruit: sell as gallon-size containers_____, sell as individual portions________
net benefit per unit: sell as gallon-size containers_______, sell as individual portions_______
number of units produced per batch: sell as gallon-size containers *_______, 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 that the 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 of sunglasses
San Jose has enough idle capacity to accept a one-time-only special order from Washington Shades for 23,000 pairs of sunglasses at $79 per pair. San Jose will not incur an variable marketing expenses for the order.
a. How would accepting the order affect San Jose's Sunglasses operating income? In addition to the special oder's effect on profits, what other (longer-term, qualitative) factors should San Jose's Sunglasses managers consider in deciding whether to accept the order? Prepare the analysis to determine the effect on operating 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 against accepting the special order because the offer price of $79 is less than San Jose's $86 cost to make the sunglasses. Bing asks you, as one of San Jose's staff accountants, to explain whether his analysis is correct.
Explanation / Answer
Answer 1. Statement of Profit Product Line Industrial System Product Line household System Total Sales revenue 350,000 360,000 710,000 Less: Variable Costs Cost of Goods sold 34,000 47,000 81,000 Marketing & Adm. Services 69,000 76,000 145,000 Total Variable Costs 103,000 123,000 226,000 Contribution 247,000 237,000 484,000 Less: Fixed Costs Cost of Goods sold 230,000 69,000 299,000 Marketing & Adm. Services 41,000 24,000 65,000 Total Fixed Costs 271,000 93,000 364,000 Profit / (Loss) (24,000) 144,000 120,000 Answer 1.1. Statement of Incremental Analysis to stop production the Industrial System Particulars Amount Expected Decrease in Revenues Dropping Industrial System Sales (350,000) expected decrease in expenses: Varaible Costs Cost of Goods sold 34,000 Marketing & Adm. Services 69,000 Saving of Fixed Costs Cost of Goods Sold 81,000 Marketing & Adm. Services 14,000 Expected Decrease in Total Expenes 198,000 Incremental profit / (Loss) (152,000) The company shoul not drop the product line as it will decrease its profit by $152000. Answer 1.2. Statement of Profit Product Line Industrial System Product Line household System Total Sales revenue 350,000 360,000 710,000 Less: Variable Costs Cost of Goods sold 34,000 47,000 81,000 Marketing & Adm. Services 69,000 76,000 145,000 Total Variable Costs 103,000 123,000 226,000 Contribution 247,000 237,000 484,000 Less: Fixed Costs Cost of Goods sold 230,000 69,000 299,000 Marketing & Adm. Services 41,000 24,000 65,000 Total Fixed Costs 271,000 93,000 364,000 Profit / (Loss) (24,000) 144,000 120,000 Statement of Profit witout Producing Industrial System Product Line household System Sales revenue 360,000 Less: Variable Costs Cost of Goods sold 47,000 Marketing & Adm. Services 76,000 Total Variable Costs 123,000 Contribution 237,000 Less: Fixed Costs Cost of Goods sold 218,000 Marketing & Adm. Services 51,000 Total Fixed Costs 269,000 Profit / (Loss) (32,000) Comparision between Profits Earned Total Profits Earned when both product produced 120,000 Total Profit (Loss) Earned when Household system produced (32,000) Incremental Loss due to Stop Production of industrial Line (152,000) Answer 1.3. The company should not stop production of industrial product as it will increase the loss by $152000 Answer 2. Calculation of profit under Different Alternative per batch Plain Yogurt Fruited Yogurt Sales - $6 X 900 Gallons $5,400 -$.54 X 19200 Portions $10,368 Less: Cost Processing Charges $880 $880 Tub Charges =$0.16 X 900 $144 $0 Packaging Cost - ($0.07 x 19200 portions) $1,344 Fruit Cost - ($0.10 X 19200 portions) $1,920 Total Costs $1,024 $4,144 Net Income $4,376 $6,224 Answer a. The company should processed the yogurt into Fruited yogurt as it will increase their profit $1848 per batch Fill In the blanks Sales revenue per unit: Sell as gallon-size containers $6 sell as individual portions $0.54 extra processing costs per unit- packaging: sell as gallon-size containers 0.98 sell as individual portions 0.05 extra processing costs per unit- adding fruit: sell as gallon-size containers 0 sell as individual portions $0.10 Packaging Costs Tub Charges $0.16 $0.07 Net Benefit pr Unit sell as gallon-size containers 4.86 sell as individual portions 0.32 Net Benfit Per Batch sell as gallon-size containers 4376 sell as individual portions 6224 Answer 3. a. Direct Material 41 Direct Labor 13 Variable Manufacturing Overhead 10 Varible Marketing Expenses 2 Fixed Manufacturing Overhead 20 Total Cost 86 Production 117500 Total Fixed Operating Expenses 2350000 Statement of Incremental Analysis of Special Sales Order Particulars Amount Expected Incerase in Revenues 1,817,000 =23000 pairs @ $79 per pair Expected Increase in Expenses Direct Material - 23000 X $41 943,000 Direct Labor - 23000 pairs X $13 299,000 Variable Manufacturing Overhead - 23000 pairs X $10 230,000 Total Increase in Expenses (23000 pairs X $64 per pair) 1,472,000 Incremental profit (23000 pairs X $15 per pair 345,000 The other factor the San Jose's Su glasses should consider: 1. It will not affect the company market of Sunglasses. 2. it is a special order and it will not be repitive in future. Answer 3. b. Peter Bing analysis is not correct due to following reasons: 1. Marketing variable cost will not be incurred for the special Order. 2. Fixed Cost will not be increased due to increase in production as the Company's has the idle capacity to produce the special order. The correct Cost of production of Special Order per pair is: Variable Costs Direct Material 41 Direct Labor 13 Variable Manufacturing Overhead 10 Total Costs 64