Chapter_13_Selected

Chapter_13_Selected - Chapter 13 Relevant Costs for...

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Chapter 13 Relevant Costs for Decision Making Exercise 13-1  (15 minutes) Case 1 Case 2 Item Relevant Not  Relevant Relevant Not  Relevant a. Sales revenue X X b. Direct materials X X c. Direct labor X X d. Variable manufacturing  overhead X X e. Depreciation— Model  B100 machine X X f. Book value— Model  B100 machine X X g. Disposal value— Model  B100 machine X X h. Market value—Model  B300 machine (cost) X X i. Fixed manufacturing  overhead X X j. Variable selling expense X X k. Fixed selling expense X X l. General administrative  overhead X X
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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) Less variable expenses   120,000           87,000         33,000     Contribution margin   180,000       153,000       (27,000     ) Less 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 Chapter 12 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 Less variable manufacturing  and selling expenses   120,000       27,000           60,000         33,000     Contribution margin   180,000       63,000           90,000
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This homework help was uploaded on 04/09/2008 for the course ACIS 2116 taught by Professor Cmeasterwood during the Fall '08 term at Virginia Tech.

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Chapter_13_Selected - Chapter 13 Relevant Costs for...

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