FINANCE

Problem 1 (ch 23)

Victoria Falls Flour Mill Company started many years ago producing a single product. It has grown to produce many diverse consumer products ranging from foods to paper goods. Currently, the corporation is barely making a profit, and the price of its stock has languished. Division managers have traditionally been incentivized with stock options and awards. However, management is evaluating a new bonus plan based on segment profits within each division. Below are 20X4 facts about the Sugar Products Division, which generates 10% of overall corporate revenue. The Sugar Products Division has two key products – raw sugar and candy.
Total sales of raw sugar and candy $ 45,750,000
Traceable, controllable, sugar division fixed costs 10,250,000
Traceable, uncontrollable, sugar division fixed costs 3,600,000
Non-traceable, controllable, sugar division fixed costs 1,500,000
Non-traceable, uncontrollable, sugar division fixed costs 1,750,000
Variable selling, general, & administrative costs 9,050,000
Variable product costs 21,700,000
General corporate expenses for all divisions 8,000,000
Prepare a contribution income statement for the aggregated Sugar Division (one column). If the division manager is to be evaluated on controllable contribution margin, would the Sugar Division manager appear to be entitled to a bonus?
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B-23.05

Worksheet 1 (ch 23)

20X4 Divisional Report for Sugar Products
Contribution Income Statement
Sales $ 45,750,000
Less:
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B-23.05

Problem 2 (ch 23)

Downhill Manufacturing produces snow skis in a two-step production process – cutting and laminating. The manufacturing center is supported by two service centers – a health clinic and a janitorial service. The following table reveals certain facts about each activity:
Health clinic Janitorial service Cutting department Laminating department
Employees 2 4 10 15
Square footage 1,200 600 12,000 8,000
Cost incurred $ 180,000 $ 125,000 $ 700,000 $ 800,000
(a) Using the direct method, allocate the service department costs to production. The clinic costs are to be allocated based on employees, and the janitorial costs are to be allocated based on the square footage.
(b) Using the step method, allocate the service department costs to production. The clinic costs are to be allocated based on employees, and the janitorial costs are to be allocated based on the square footage. The first step will be to allocate clinic costs. The clinic employees maintain their space and do not rely upon the janitorial service. However, janitorial employees occasionally sustain an injury and utilize the clinic.
B-23.08

Worksheet 2 (ch 23)

(a)
Health clinic Janitorial service Cutting department Laminating department
Cost incurred $ 180,000 $ 125,000 $ 700,000 $ 800,000
Clinic allocation
Janitorial allocation
Total cost $ – $ – $ – $ –
Clinic allocations:
Janitorial allocations:
(b)
Health clinic Janitorial service Cutting department Laminating department
Cost incurred $ 180,000 $ 125,000 $ 700,000 $ 800,000
Clinic allocation
Janitorial allocation
Total cost $ – $ – $ – $ –
Clinic allocations:
Janitorial allocations:
B-23.08

Problem 3 (ch 24)

Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort has been producing and selling approximately 500,000 units per year. Each units sells for $600, and there are no variable selling, general, or administrative costs. The company has been approached by a foreign supplier who wishes to provide the air compressor component for $90 per unit. Total annual manufacturing costs, including air compressors, is as follows:
Direct materials $ 50,000,000
Direct labor 80,000,000
Variable factory overhead 16,000,000
Fixed factory overhead 35,000,000
If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 20%, direct labor by 30%, and variable factory overhead by 25%. There will be no reduction in fixed factory overhead.
(a) Should Pure Comfort outsource the air compressor?
(b) If outsourcing the air compressor will free up capacity, and enable Pure Comfort to increase production and sales to 600,000 units per year, would it make sense to outsource?
B-24.02

Worksheet 3 (ch 24)

(a)
Internal Outsource
Direct materials $ – $ –
Direct labor
Variable factory overhead
Fixed factory overhead
Outsourced compressors
Total cost of each option $ – $ –
(b)
B-24.02

Problem 4 (ch 24)

Summit Paintball Supply manufactures paintballs used by recreational gamers. The cost of producing a box of 2,500 paintballs is as follows:
Direct materials $ 12.50
Direct labor 6.25
Variable factory overhead 18.75
Fixed factory overhead 25.00
Variable selling, general, and administrative costs 18.75
Fixed selling, general, and administrative costs 4.00
The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. The company has capacity to produce 500,000 boxes without impacting either category of fixed cost.
(a) The market for paintballs has become very competitive. Management has requested to know the break-even price that can be charged for a box of paintballs, assuming production and sale of 400,000 boxes.
(b) Management has received a special order request for 100,000 boxes of “private label” paintballs. The order specifies a per box price of $75. How will profitability be impacted if the order is accepted?
B-24.03

Worksheet 4 (ch 24)

(a)
(b)
B-24.03

Problem 5 (ch 24)

Air Mall produces a catalog that is placed in airline seatbacks during international flights. Passengers typically skim the catalog during flights and can buy selected merchandise from flight attendants, duty and tax free, while over international waters. Below is a report for a recent period:
Total Beverages Jewelry Electronics
Sales $ 2,600,000 $ 1,400,000 $ 500,000 $ 700,000
Variable expenses 1,635,000 980,000 200,000 455,000
Contribution margin $ 965,000 $ 420,000 $ 300,000 $ 245,000
Fixed expenses 900,000 300,000 300,000 300,000
Income (loss) $ 65,000 $ 120,000 $ – $ (55,000)
The fixed expense is the amount paid for printing the catalog and paying the airline to include the item in seatbacks. Management is evaluating discontinuing the sale of electronics products. Fixed costs will not change; however, jewelry sales are expected to increase by 30%.
Determine if overall income will be improved if the sale of electronics products is ceased.
B-24.04

Worksheet 5 (ch 24)

Total Beverages Jewelry Electronics
Sales $ – $ – $ – $ –
Variable expenses
Contribution margin $ – $ – $ – $ –
Fixed expenses
Income (loss) $ – $ – $ – $ –
B-24.04

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