Ch.11- Solutions - Chapter11 RelevantCostsforDecisionMaking...

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Chapter 11 Relevant Costs for Decision Making Brief Exercise 11-2  1. No, production and sale of the racing bikes should not be discontinued. If the  racing bikes were discontinued, then the net operating income for the company  as a whole would decrease by $11,000 each quarter: Lost contribution margin. ...................................................... $(27,000) Fixed costs that can be avoided: Advertising, traceable. ....................................................... $ 6,000 Salary of the product line manager. ...................................   10,000           16,000     Decrease in net operating income for the company as a whole. ................................................................................. $(11,000 ) The depreciation of the special equipment is a sunk cost and is not relevant to the  decision. The common costs are allocated and will continue regardless of  whether or not the racing bikes are discontinued; thus, they are not relevant to the  decision. Alternative Solution: Current  Total Total If  Racing  Bikes Are  Dropped Difference:  Net  Operating  Income  Increase or  (Decrease) Sales. .............................................................. $300,000 $240,000 $(60,000) Variable expenses. .........................................   120,000           87,000         33,000     Contribution margin. .....................................   180,000       153,000       (27,000     ) Fixed expenses: Advertising, traceable. ............................... 30,000 24,000 6,000 Depreciation on special equipment*. ............................................ 23,000 23,000 0 Salaries of product managers. .................... 35,000 25,000 10,000 Common allocated costs. ...........................       60,000         60,000                           0    Total fixed expenses. .....................................   148,000       132,000           16,000     Net operating income. ................................... $      32,000     $      21,000     $      (11,000     ) *Includes pro-rated loss on the special equipment if it is disposed of.
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Brief Exercise 11-2  2. The segmented report can be improved by eliminating the allocation of the  common fixed expenses. Following the format introduced in Chapter 10 for a  segmented income statement, a better report would be: Total Dirt  Bikes Mountain  Bikes Racing  Bikes Sales. ................................................... $300,000 $90,000 $150,000 $60,000 Variable manufacturing and selling expenses. .........................................  
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This note was uploaded on 12/11/2010 for the course ACC ACC taught by Professor Laila during the Spring '10 term at American University of Sharjah.

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Ch.11- Solutions - Chapter11 RelevantCostsforDecisionMaking...

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