800000 640000 160000 At proposed new operation 800000 720000 80000 Percentage

800000 640000 160000 at proposed new operation 800000

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= $800,000 − $640,000 = $160,000 - At proposed new operation: ?????? ?????? = ???????? ????? ????? ???? ????? = $800,000 − $720,000 = $80,000 + Percentage: - At present operation: Safety in dollars $160,000 Safety percentage = = = 20% Total sales $800,000 - At proposed new operation: Safety in dollars $80,000 Safety percentage = = = 10% Total sales $800,000 4
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3. The manager factor would be the sensitivity of the company’s operations to cyclical movements in the economy. The reason is that the new equipment will increase the CM ratio, permitting profits to rise more rapidly in years that sales are strong. So, management should decide whether the potential for bigger profits in good years is worth the risk of deeper losses in bad years. 4. The break-even point in dollar sales: Fixed costs $240,000 BEF in Dollars = = = $960.000 CM ratio 0.25 At the good year (it is easy to get the sales value as estimation), this idea is OK. At the bad year (it is difficult to get the sales value as estimation), this idea is NG. 5
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TASK 2: Dropping or Retaining a Product Henry Douglas is the owner and managing director of Heritage Furniture, Ltd., a South African company that makes museum-quality reproductions of antique outdoor furniture. Ms. Douglas would like advice concerning the advisability of eliminating the model C3 lawn- chair. These lawn chairs have been among the company’s best-selling products, but they seem to be unprofitable. A condensed absorption costing income statement for the company and for the model C3 lawn chair for the quarter ended June 30 follows: All Products Model C3 Lawn chair Sales. . . . . . . . . . . . . . . . . . . . . . . . . …..R2,900,000 R300,000 Cost of goods sold: Direct materials. . . . . . . . . . . . . . . . . 759,000 122,000 Direct labor . . . . . . . . . . . . . . . . . . . . 680,000 72,000 Fringe benefits (20% of direct labor) . 136,000 14,400 Variable manufacturing overhead . . . .28,000 3,600 Building rent and maintenance . . . . . 30,000 4,000 Depreciation . . . . . . . . . . . . . . . . . . . . 75,000 19,100 Total cost of goods sold . . . . . . . . . . . . . . 1,708,000 235,100 Gross margin. . . . . . . . . . . . . . . . . . . . . . . 1,192,000 64,900 Selling and administrative expenses: Product managers’ salaries . . . . . . . ..75,000 10,000 Sales commissions (5% of sales). . . . 145,000 15,000 Fringe benefits………………………...44,000 5,000 (20% of salaries and commissions) Shipping. . . . . . . . . . . . . . . . . . . . . ….120,000 10,000 General administrative expenses . . … 464,000 48,000 Total selling and administrative expenses . .848,000 88,000 Net operating income (loss) . . . . . . . . . . . . .R344,000 R(23,100) The currency in South Africa is the rand, denoted here by R. The following additional data have been supplied by the company: a. Direct labor is a variable cost. 6
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b. All of the company’s products are manufactured in the same facility and use the same equipment. Building rent and maintenance and depreciation are allocated to products using various bases. The equipment does not wear out through use; it eventually becomes obsolete. c. There is ample capacity to fill all orders. d. Dropping the model C3 lawn chair would have no effect on sales of other product lines. e. Work in process and finished goods inventories are insignificant. f. Shipping costs are traced directly to products. g. General administrative expenses are allocated to products on the basis of sales. There would be no effect on the total general administrative expenses if the model C3 lawn chair were dropped. h. If the model C3 lawn chair were dropped, the product manager would be laid off.
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