Week 6 Quiz - 1 - Grading Summary These are the...

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Grading Summary These are the automatically computed results of your exam. Grades for essay questions, and comments from your instructor, are in the "Details" section below. Date Taken: 12/9/2012 Time Spent: 1 h , 15 min , 44 secs Points Received: 28 / 40 (70%) Question Type: # Of Questions: # Correct: Short 6 N/A Grade Details - All Questions 1 . Questio n : (TCO 7) Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the snail extraction line of products takes up approximately 50 percent of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering snail extraction tools or focus only on serving pieces. If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided and serving piece sales would increase by 13 percent. Allocated fixed costs are assigned based on relative sales. Snail Extraction Serving Tools Pieces To tal Sales 1,200,000 $800,000 $2,000,000 Less cost of goods sold 700,000 500,000 1,200,000 Contribution margin 500,000 300,000 800,000 Less direct fixed costs: Salaries 175,000 175,000 350,000 Other 60,000 60,000 120,000 Less allocated fixed costs: Rent 14,118 9,882 24,000 Insurance 3,529 2,471 6,000 Cleaning 4,117 2,883 7,000 Executive salary 76,470 53,530 130,000 Other 7,058 4,942 12,000 Total costs 340,292 308,708 649,000 Net income $159,708 ($ 8,708) $151,000 Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the snail extraction tool line. Student Answer: Snail Extraction Tools Serving Pieces Total Sales $904,000 $904,000 Less cost of goods sold $565,000 $565,000 Contribution margin $0 $339,000 $339,000 Less direct fixed costs: Salaries $0 $175,000 $175,000 Other $0 $60,000 $60,000 Less allocated fixed costs: Rent $0 $24,000 $24,000 Insurance $0 $6,000 $6,000 Cleaning $0 $7,000 $7,000 Executive salary $0 $130,000 $130,000 Other $0 $12,000 $12,000 Total costs $0 $414,000 $414,000 Net income $0 ($75,000) ($75,000) Net operating loss from eliminating the Snail Extraction Tool Line ($75,000) Recent Net Operating Income - total $151,000
Effect on overall profit (decrease) ($226,000) Alternative Solution: Total contribution margin loss (100%) ($800,000) Serving Pieces Line contribution margin $339,000 Avoidable fixed cost saved by eliminating snail extraction tools $235,000 Effect on overall profit (decrease) ($226,000) Serving piece sales would increase by 13 percent. Cost of sales will increase by 13 percent as well Explanation: If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided. Explanation: If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided. Allocated fixed costs are assigned based on relative sales; since there will be no sales if the snail extraction tool line is eliminated, the allocated fixed costs will be assigned to the serving pieces line.

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