The fixed general contributionthe digital watch line

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Unformatted text preview: he digital watch line. The fixed general $ 300,000 dropping margin Less: fixed expenses and general administrative ffactory overhead and general administrative actory overhead General factory overhead $ 60,000 expenses assigned to this product would be expenses manager Salary of line assigned to this product would be 90,000 reallocated to other product lines. rreallocated to other product lines. reallocated Depreciation of equipment 50,000 eallocated Advertising - direct 100,000 Rent - factory space 70,000 General admin. expenses 30,000 400,000 Net operating loss $ (100,000) 10-22 Adding/Dropping Segments Segment Income Statement Digital Watches Sales $ 500,000 Less: variable expenses The equipment used to manufacture The equipment used to manufacture Variable manufacturing costs $ 120,000 digital watches has no resale Variable shipping costs 5,000 digital watches has no resale Commissions or alternative use. 75,000 200,000 value or alternative use. value Contribution margin $ 300,000 Less: fixed expenses General factory overhead $ 60,000 Salary of line manager 90,000 Should Lovell retain or drop Should Depreciation of equipment Lovell retain or drop 50,000 Advertising - direct the digital watch segment? 100,000 the digital watch segment? Rent - factory space 70,000 General admin. expenses 30,000 400,000 Net operating loss $ (100,000) 10-23 A Contribution Margin Approach Contribution Margin Solution Contribution margin lost if digital watches are dropped Less fixed costs that can be avoided Salary of the line manager $ 90,000 Advertising - direct 100,000 Rent - factory space 70,000 Net disadvantage $ (300,000) 260,000 $ (40,000) Re Re tta aii n n 10-24 Comparative Income Approach The Lovell solution can also be obtained by preparing comparative income statements showing results with and without the digital watch segment. Let’s look at this second approach. 10-25 Comparative Income Approach Solution Keep Drop Digital Digital W atches W atches Difference Sales $ 500,000 $ $ (500,000) Less variable expenses: Manufacturing expenses 120,000 120,000 Shipping 5,000 5,000 Commissions 75,000 75,000 Total variable expenses 200,000 200,000 Contribution margin 300,000 (300,000) Less fixed expenses: General factory overhead 60,000 Salary of line manager 90,000 Depreciation 50,000 IIf the digital watch f the digital watch Advertising - direct 100,000 lline is dropped, the ine is dropped, the Rent - factory space 70,000 company loses General admin. expenses 30,000 company loses Total fixed expenses 400,000 $300,000 in $300,000 in Net operating loss $ (100,000) contribution margin. contribution margin. 10-26 Comparative Income Approach Solution Keep Drop Digital Digital W atches W atches Difference Sales $ 500,000 $ $ (500,000) Less variable expenses: Manufacturing expenses 120,000 120,000 Shipping 5,000 5,000 Commissions 75,000 75,000 Total variable expenses 200,000 200,000 Contribution margin 300,000 (300,000) Less fixed expenses: General factory overhead 60,000 60,000 Salary of line manager 90,000 Depreciation 50,000 On 100,000 On the other hand, the general the other hand, the general Advertising - direct Rent - factory space 70,000 factory overhead would be the factory overhead would be the General admin. expenses 30,000 same under both alterna...
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This document was uploaded on 03/23/2014.

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