Assignment:
I. Structuring a Keep-or-Drop Product Line Problem
Shown below is a segmented income statement for Orzo Company's three laminated flooring product lines:
|
|
Strip
|
Plank
|
Parquet
|
Total
|
|
Sales revenue
|
$400,000
|
$200,000
|
$300,000
|
$900,000
|
|
Less: Variable expenses
|
225,000
|
120,000
|
250,000
|
595,000
|
|
Contribution margin
|
$175,000
|
$ 80,000
|
$ 50,000
|
$305,000
|
|
Less direct fixed expenses:
|
|
|
|
|
|
Machine rent
|
(5,000)
|
(20,000)
|
(50,000)
|
(75,000)
|
|
Supervision
|
(15,000)
|
(10,000)
|
(20,000)
|
(45,000)
|
|
Depreciation
|
(35,000)
|
(10,000)
|
(25,000)
|
(70,000)
|
|
Segment margin
|
$120,000
|
$ 40,000
|
$ (45,000)
|
$115,000
|
Orzo's management is deciding whether to keep or drop the parquet product line. Orzo's parquet flooring product line has a contribution margin of $50,000 (sales of $300,000 less total variable costs of $250,000). All variable costs are relevant. Relevant fixed costs associated with this line include $30,000 in machine rent and $4,700 in supervision salaries.
Required:
1. List the alternatives being considered with respect to the parquet flooring line.
2. Which alternative is more cost effective and by how much? by
II. Make-or-Buy Decision
LaSalle Manufacturing had always made its components in-house. However, Jasper Component Works had recently offered to supply one component, C-430, at a price of $13 each. LaSalle uses 4,500 units of Component C-430 each year. The cost per unit of this component is as follows:
|
Direct materials
|
$7.86
|
|
Direct labor
|
2.71
|
|
Variable overhead
|
1.97
|
|
Fixed overhead
|
3.00
|
|
Total
|
$15.54
|
The fixed overhead is an allocated expense; none of it would be eliminated if production of Component C-430 stopped.
Required:
1. List the relevant costs for each alternative. If required, round your answers to two decimal places.
If LaSalle decides to purchase the component from Jasper, by how much will operating income increase or decrease?
2. Conceptual Connection: Which alternative is better?
III. Keep-or-Drop Decision
Petoskey Company produces three products: Alanson, Boyne, and Conway. A segmented income statement, with amounts given in thousands, follows:
|
|
Alanson
|
Boyne
|
Conway
|
Total
|
|
Sales revenue
|
$1,280
|
$185
|
$285
|
$1,750
|
|
Less: Variable expenses
|
1,115
|
45
|
228
|
1,388
|
|
Contribution margin
|
$165
|
$140
|
$57
|
$362
|
|
Less direct fixed expenses:
|
|
|
|
|
|
Depreciation
|
50
|
15
|
13
|
78
|
|
Salaries
|
95
|
85
|
116
|
296
|
|
Segment margin
|
$20
|
$40
|
$(72)
|
$-12
|
Direct fixed expenses consist of depreciation and plant supervisory salaries. All depreciation on the equipment is dedicated to the product lines. None of the equipment can be sold.
Assume that each of the three products has a different supervisor whose position would remain if the associated product were dropped.
Required:
Conceptual Connection: Estimate the impact on profit that would result from dropping Conway. Enter amount in full, rather than in thousands. For example, "15000" rather than "15".
IV. Sell at Split-Off or Process Further
Bozo Inc. manufactures two products from a joint production process. The joint process costs $110,000 and yields 6,000 pounds of LTE compound and 14,000 pounds of HS compound. LTE can be sold at split-off for $55 per pound. HS can be sold at split-off for $13 per pound. A buyer of HS asked Bozo to process HS further into CS compound. If HS were processed further, it would cost $40,800 to turn 14,000 pounds of HS into 4,000 pounds of CS. The CS would sell for $47 per pound.
Required:
1. What is the contribution to income from selling the 14,000 pounds of HS at split-off?
2. Conceptual Connection: What is the contribution to income from processing the 14,000 pounds of HS into 4,000 pounds of CS?
Should Bozo continue to sell the HS at split-off or process it further into CS?
Attachment:- Rini_Company_Info.xlsx