Lecture 11 Lecture Illustration Solution

# Lecture 11 Lecture Illustration Solution - Sales revenue...

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EXAMPLE 1 - Drop product line: retailer The owner’s analysis incorrectly includes the following allocated costs that will be incurred regardless of whether the ice-cream counter is operated: Utilities Depreciation of building \$2900 4000 Deli manager’s salary 3000 Total \$9900 It is possible that closing the ice cream counter might save a portion of the utility cost, but that is doubtful. A better analysis follows: Sales \$45 000 Less: Cost of food 20 000 Gross profit 25 000 Less: Operating expenses Wages of counter staff \$12 000 Paper products 4 000 Depreciation of counter equipment and furnishings* 2 500 Total 18 500 Profit on ice cream counter \$ 6 500 * Depreciation on the counter equipment and furnishings is included because it is traceable to the ice-cream operation and is an expense in the determination of profit. If a cash-flow analysis is desired, this non-cash expense should be excluded.

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Unformatted text preview: Sales revenue lost \$(45,000) Savings on incremental costs: Cost of food \$ 20,000 Wages of counter staff 12,000 Paper products 4,000 Dep. of counter Eqpt. & Fur. 2,500 Total 38,500 Gain (loss) by deleting a product \$ (6,500) Example 2 – Further processing: manufacturer Sales revenue for one jar of silver polish \$4.00 Sales revenue for 0.25 kg of Grit 337 (opportunity cost given limited capacity of Grit 337) 0.50 Incremental revenue from further processing \$3.50 Incremental costs for further processing: Processing costs \$2.50 Selling costs 0.30 2.80 Incremental contribution margin from processing further \$0.70 Minimum number of jars = ±²³´ µ¶·¸¹³º·´¸»²¼½¼¸²¹¸¹¾¿½À·¿¸Á¿²»·¼¼³ÂÃ ³Â»¿·Ä·Â½ ¶¸»²Â½¿³µ¾½³²Â¸Ä ¿Ã³Â = ÅÆÇÈÈ ÅÈÉÊÈ = 8000 jars If more than 8000 jars of silver polish can be sold, Hercules Cleaning Company should process the required amount of Grit 337 further into the polish....
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