Chapter 14 Solutions

# Chapter 14 Solutions - Base Case14.44 Sales VC CM CMR FC TC...

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Base Case14.44 P&S Carpeting Wallpaper Sales 190000 230000 70000 VC 114000 161000 56000 CM 76000 69000 14000 CMR 0.4 0.3 0.2 FC 28000 37500 22500 TC 142000 198500 78500 Op Income 48000 31500 -8500 After Dropping wallpaper P&S Carpeting Wallpaper Sales 152000 290000 0 VC 91200 188500 0 CM 60800 101500 CMR 0.4 0.35 FC 28000 50000 13500 TC 119200 238500 13500 Op Income 32800 51500 -13500 for P&S For Carpet ( new) 32800 38000 Net benefit by closing Wallpaper o 200 Assumption: Cost of 6200 hundred incurred will be a one-time cost. Hence, will not be considered for calculation of operating profits Finished Goods inventory of Wallpaper, is a sunk cost and will not be considered while computing operating profits. Internet based firms have lower fixed cost like rental for stores, the no. of sales people etc and may be a lower inventory if they get the order shipped directly from the manufacturer, which generally is the case! (Solution prepared by Rohit, Reema Mahajan and Others) I. ORIGINAL INCOME STATEMENT Carpeting Wallpaper Sales 190000 230000 70000 Variable Cost 114000 161000 56000 Fixed Cost 28000 37500 22500 Total Cost 142000 198500 78500 Operating Income 48000 31500 -8500 Total Operating Income 71000 Contribution Margin Ratio 0.30 Out of Pocket Cost 6200 New CM Ratio 0.315 New Variable Cost 198650 II. NEW INCOME STATEMENT Carpeting Wallpaper Sales 152000 290000 70000 Variable Cost 91200 198650 56000 Fixed Cost 28000 37500 22500 Total Cost 119200 236150 78500 Operating Income 32800 53850 -8500 Additional FC 13500 12500 Total operating income 60650 60650 Decrease in operating income 10350 54450 Decrease in operating income 16550 QUESTION 1 Decision QUESTION 2 Decision (solution prepared by Gaurav Jain and others) Paint and Supplies Paint and Supplies From wallpaper business Increased Ad- Expense Operating income without taking out- of-pocket expense into consideration Operating income while taking out- of-pocket expense into consideration Contemporary Trends should not go for divesting the wallpaper business because of decrease in operating income If the wallpaper inventory is work-in- process then it is an opportunity cost as it could have been converted into finished goods and sold had the division continued. This would further decrease the operating income for this year. If the wallpaper inventory is a finished good then the company can sell it to earn money. The earnings will be determined by the market price of the finished goods inventory and the marketing costs. In any case, the wallpaper inventory should not impact the decision as it is a not a recurring cost/revenue.

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Problem 14-45 Part a SP per unit Unit costs minus cutting and material Option 1: Only dress option 2: With cape an Incremental values Dress 320 128 Cape 44 31.2 sales units 1250 1500 250 Handbag 15.2 10.4 Sales price 320 - Total sales in dollars 400000 549540 149540 Remnant sales 10000 0 -10000 Total revenue 410000 549540 139540 Material costs 100000 120000 20000 Cutting costs 40000 69600 29600 Non cutting 160000 240828 80828 Total costs 300000 430428 130428 Total profits 110000 119112 9112 Answer Gain of 9112 (Solution provided by Arjun and Others)
Unit Cost Data As Given Blender Food Processer Direct Material \$18.00 \$33.00 Direct Labour 12 27 Machine hours 1 2 Manufacturing Fixed 30 60 30 per hour Variable 18 36 Variable Cost/unit \$48.00 \$96.00 Sum of Direct Labour+Material+Variable overhead Total Fixed Cost 1500000 (this value can be ignored for further calculations) Annual Demand 20000 28000 Pr 1 Purchase price (outside supplier) 60 114

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## Chapter 14 Solutions - Base Case14.44 Sales VC CM CMR FC TC...

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