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         27,000     Less traceable fixed expenses: Advertising 30,000 10,000 14,000 6,000 Depreciation of special  equipment 23,000 6,000 9,000 8,000 Salaries of the product line  managers       35,000       12,000           13,000         10,000     Total traceable fixed  expenses       88,000       28,000           36,000         24,000     Product line segment margin 92,000 $35,000 $  54,000 $ 3,000 Less common fixed expenses       60,000    
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