AC505 Chap 13 Hmwk Solutions - Chapter13...

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Chapter 13 Relevant Costs for Decision Making Exercise 13-2  (30 minutes) 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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Exercise 13-2  (continued) 2. The segmented report can be improved by eliminating the allocation  of the common fixed expenses. Following the format introduced in 
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AC505 Chap 13 Hmwk Solutions - Chapter13...

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