A contribution format income statement for the most recent year for Big Bear Consumer Electronics Inc. is shown below.
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Total Department
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AM/FM radios
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HD radios
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Sales
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$320,000
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100%
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$270,000
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100%
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$50,000
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100%
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Less variable expenses
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236,000
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74%
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216,000
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80%
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20,000
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40%
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Contribution Margin
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84,000
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26%
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54,000
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20%
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30,000
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60%
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Less Traceable Fixed Expenses
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15,000
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5%
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10,000
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4%
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5,000
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10%
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Segment Margin
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69,000
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22%
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$44,000
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16%
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$25,000
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50%
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Less Common Fixed Expenses
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40,000
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13%
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Net Operating Income
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$29,000
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9%
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PROBLEM BACKGROUND:
Shortly after graduating with a business degree from Bridgewater State University, you are hired as an assistant to the District Manager of a national consumer electronics chain.
During your first day on the job, you attend a meeting regarding product lines carried by the chain. You learn about a fairly new innovation called HD (high definition) radio. This product allows consumers to listen to not only traditional AM and FM bands, but also to the newly created HD frequencies that most local radio stations are broadcasting free of charge to listeners on adjacent frequencies that previously were unused. Unlike satellite radio, this service requires no subscription charges. Consumers who have heard HD radio tell you that AM-HD broadcasts sound like FM and FM-HD broadcasts sound like CD quality!
Due to improved manufacturing technologies, the cost to manufacture HD radios has dropped dramatically.
PROBLEM:
Your boss (the District Manager) has authorized you to spend $10,000 for advertising for one of your chain's local stores, promoting one of their product lines. A Marketing Research class at Bridgewater State University conducted a study indicating that the additional advertising would increase sales of the AM/FM radios by $50,000 and increase sales of the HD radios by only $45,000.
The local store manager (who never took a course in Managerial Accounting) argues that the advertising budget should be spent on the AM/FM radios because it will result in more sales dollars. The store manager also argues that the AM/FM radio line's total sales are substantially higher than the HD line, therefore as the biggest selling item, it should receive all advertising allotments.
REQUIRED: YOU ARE TO WORK INDEPENDENTLY
a) Determine which product line (AM/FM radios or HD radios) you will spend the $10,000 of advertising on. Show your work, justifying this decision, based upon a cost/benefit analysis. What would you tell the store manager? Include a short memo to your boss (the District Manager) explaining your decision.
b) Using Excel, prepare a new segmented income statement (including the new sales and cost data) based upon your recommendation. (hint: on what line would the $10,000 of dedicated advertising appear?)
c) What form of media would you recommend using to advertise your chosen product line? (explain why)
d) Are there any "implicit" considerations that should enter the decision on which product line to promote?