30 Minutes, Medium PROBLEM 22.2B
BROWN ENTERPRISES
a. Responsibility income statement:
BROWN ENTERPRISES
Responsibility Income Statement
PROBLEM 22.2B
BROWN ENTERPRISES (concluded)
b.
p
g
g
(
)
p
c. Results of investment in each
p
roduct line:
Ba
g
s Shoes
Ex
p
ected increase in contribution mar
g
in:
Ba
g
s
(
$250,000 × 40%
)
100,000$
p
Because of the relatively high contribution margin ratio in the shoe segment, spending
$50,000 per month to achieve a monthly sales increase of $100,000 will increase overall
profitability. Bags, however, provides a lower contribution margin ratio. After variable
costs, a $100,000 increase in bag sales leaves only $40,000 in contribution margin, which
does not cover the cost of the proposed advertising campaign.
profitable results. The contribution margin ratio of the Bag line is considerably less than
that of the Shoe line (40% compared to 70%). Thus, an expected increase of $250,000 in
sales for the Bag line will only contribute $100,000 toward covering the expected increase in
the line’s traceable fixed costs of $150,000 ($250,000 × 60%). On the other hand, a $250,000
increase in sales of shoes will produce a contribution margin that is greater than the
Recommendations on increased advertising:.
It appears that increasing advertising expenditures on shoes will increase the profitability of
the business, but spending the proposed amount to advertise bags would reduce
profitability.
Short-run decisions that are not likely to affect fixed costs may be evaluated based upon the
expected change in contribution margin. Thus, the expected effect of the proposed
advertising campaign upon income from operations may be summarized as follows:
g
30 Minutes, Medium PROBLEM 22.3B
GLASSWARE COMPANY
a. Responsibility income statement for August:
Entire Company Etched Glass Division Clear Glass Division
Dollars Percent Dollars Percent Dollars Percent
Sales 13,500,000$ 100.0 7,500,000$ 100.0 6,000,000$ 100.0
GLASSWARE COMPANY
For August
Responsibility Income Statement
PROBLEM 22.3B
GLASSWARE COMPANY (concluded)
b.
Division Sales
÷ Contribution Margin Ratio
Sales volume required for a $1,600,000 monthly responsibility margin in the Clear Glass
Division may be computed as follows:
= [Division Fixed Costs + Responsibility Margin]
60 Minutes, Strong PROBLEM 22.4B
FREEZE, INC.
a. FREEZE, INC.
Responsibility Income Statement
Northern Territory
For January
Northern Territory Economy Efficiency
Dollars Percent Dollars Percent Dollars Percent
Common fixed costs 125,000 8.3
Operating income 235,000$ 15.7%
b. FREEZE, INC.
Responsibility Income Statement
For January
Fixed costs traceable to territories 705,000 30.7 * 415,000 27.6 290,000 36.0
Division responsibility margin 393,000$ 17.1 235,000$ 15.7% 158,000$ 20.0%
PROBLEM 22.4B
FREEZE, INC. (concluded)
c. Each territory’s return on assets: Northern Southern
Territory Territory
Responsibility margin 235,000$ 158,000$
e.
Econom
y
Efficienc
y
Incremental revenue 100,000$ 100,000$
f.
territories, this $125,000 is combined with the other fixed costs of the Northern Territory
and is shown as “Fixed costs traceable to territories.”
The manager should focus the campaign on the product line that will generate the greatest
contribution margin in relation to the additional fixed advertising cost. Thus, the manager
should support advertising of Economy as shown below:
In the type of long-run investment described, top management must be aware of the
ability of the investment to cover fixed costs as well as variable costs. Thus, management
higher return of 1.6% per month, or 19.2% per year. Thus, the Southern Territory
appears to offer the higher potential return on investment.
45 Minutes, Strong PROBLEM 22.5B
SOTHEBY, INC.
a. Computation of expected change in responsibility margin:
(1) Product C (2) Product D
Expected increase in sales 25,000$ 25,000$
Product contribution margin ratio × 50% × 19%
b.
When an increase in revenue requires new manufacturing facilities, the revenue must be
sufficient to cover the increase in fixed costs as well as the variable costs of production. The
ability to cover fixed costs is indicated by the responsibility margin ratio. Product C has the
higher responsibility margin ratio, with 27% of total revenue currently adding directly to
PROBLEM 22.5B
SOTHEBY, INC. (concluded)
SOTHEBY, INC.
Income Statement by Divisions
PROBLEM 22.6B
FOOTWARE, INC.
a.
15 Minutes, Easy
Closure of the Sandal Division would increase the company’s operating income to $9,000 (a
$2,000 increase resulting from the elimination of the negative responsibility margin