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ch_13_HW - Exercise 131(15 minutes Case 1 Not Item Relevant...

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Exercise 13-1  (15 minutes) Case 1 Case 2 Item Relevant Not  Relevant Relevant Not  Relevant a. Sales revenue ................ X X b. Direct materials .............. X X c. Direct labor .................... X X d. Variable manufacturing  overhead ..................... X X e. Book value—Model  A3000 machine ........... X X f. Disposal value—Model  A3000 machine ........... X X g. Depreciation—Model  A3000 machine ........... X X h. Market value—Model  B3800 machine (cost). X X i. Fixed manufacturing  overhead ..................... X X j. Variable selling expense X X k. Fixed selling expense .... X X l. General administrative  overhead ..................... X X
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Exercise 13-2  (30 minutes) 1. No, the housekeeping program should not be discontinued. It is  actually generating a positive program segment margin and is, of  course, providing a valuable service to seniors. Computations to  support this conclusion follow: Contribution margin lost if the housekeeping  program is dropped ............................................. $(80,000) Fixed costs that can be avoided: Liability insurance ................................................ $15,000 Program administrator’s salary ............................   37,000         52,000     Decrease in net operating income for the  organization as a whole ....................................... $(28,000 ) Depreciation on the van is a sunk cost and the van has no salvage  value since it would be donated to another organization. The  general administrative overhead is allocated and none of it would  be avoided if the program were dropped; thus it is not relevant to  the decision. The same result can be obtained with the alternative analysis  below: Current  Total Total If  House- keeping Is  Dropped Difference:  Net  Operating  Income  Increase or  (Decrease) Revenues ....................................... $900,000 $660,000 $(240,000) Variable expenses .........................   490,000       330,000           160,000     Contribution margin .......................   410,000       330,000           (80,000     ) Fixed expenses: Depreciation* .............................. 68,000 68,000 0 Liability insurance ....................... 42,000 27,000 15,000 Program administrators’ salaries. 115,000 78,000 37,000 General administrative overhead   180,000         180,000                               0    Total fixed expenses ......................   405,000         353,000               52,000     Net operating income (loss) ........... $          5,000     $(23,000 ) $       (28,000     )
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*Includes pro-rated loss on disposal of the van if it is donated to a  charity.
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Exercise 13-2  (continued) 2. To give the administrator of the entire organization a clearer picture  of the financial viability of each of the organization’s programs, the  general administrative overhead should not be allocated. It is a  common cost that should be deducted from the total program  segment margin. Following the format introduced in Chapter 12 for  a segmented income statement, a better income statement would  be: Total Home  Nursing Meals on  Wheels House- keeping Revenues ............................. $900,000 $260,000 $400,000 $240,000 Variable expenses ................   490,000       120,000       210,000       160,000     Contribution margin ..............   410,000       140,000       190,000           80,000     Traceable fixed expenses: Depreciation ...................... 68,000 8,000 40,000 20,000 Liability insurance .............. 42,000 20,000 7,000 15,000 Program administrators’  salaries ...........................   115,000  
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