Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
8-40
SOLUTIONS TO CASES
Case 8-32
b.
Option 1
Option 2
Option 3
Registration fee revenuea
$ 8,925
$ 0
$ 76,440
Expenses
Meals
1,875
16,250
Conference materials
675
5,850
Direct mail advertising
4,500
4,500
6,000
Meeting room rental
3,500
3,500
Cancellation fee
10,000
Guest room guarantee fee
5,000
Equipment rental
500
500
Speaker fees:
Newton
600
600
Smith
2,000
2,000
Townsley
4,000
1,000
4,000
Speaker travel:
Newton
200
200
Smith
1,200
800
1,300
Townsley
1,000
Compton
200
200
Total expenses
25,250
16,300
40,400
Operating income
($16,325)
($16,300)
$36,040
aRegistration fee income for option 3
(6,500 mailings 2% 90% $595) + (6,500 mailings 2% 10% $525)
Chapter 8 – Using Accounting Information to Make Managerial Decisions
8-41
Case 8-32, continued
c.
Option 1
Option 2
Option 3
Net Income
($16,325)
($16,300)
$36,040
Add back unavoidable costs
Direct mail advertising
4,500
4,500
4,500
Townsley speaker fees
1,000
1,000
1,000
Relevant income (loss)
($10,825)
($10,800)
$41,540
make or lose with each option.
d. Holding the conference as scheduled will maintain Flagstone’s
its reputation in the marketplace. Canceling the conference may
result in some damage to that reputation. There may also be some
reputation damage in the eyes of the speakers that had been retained
for the conference. While University Parks Inn is compensated for
8-42
Case 8-32, continued
amount.
f. In addition to the benefits of holding the conference as scheduled,
rescheduling the conference will allow Flagstone more time to market
the conference and increase attendance. This would generate
professionals from registering and attending.
g. In looking at the conference, Flagstone needs to ensure that the
conference supports the mission, vision, and values of the firm.
lessons for planning future conferences.
8-43
Case 8-33
a. Pick the selling price that maximizes total contribution margin:
Household
Sales
Variable
costsa
Contribution
margin
Units
sold
Total
contribution
margin
$18
$16
$2
120,000
$240,000
$20
$16
$4
100,000
$400,000
$21
$16
$5
90,000
$450,000
$22
$16
$6
80,000
$480,000
$23
$16
$7
50,000
$350,000
aRaw materials + Direct labor + Variable overhead + Variable selling and administrative = $7 + 4
+ 1 + 4= $16
Commercial
Sales
Variable
costsa
Contribution
margin
Units
sold
Total
contribution
margin
$25
$21
$4
175,000
$700,000
$27
$21
$6
140,000
$840,000
$30
$21
$9
100,000
$900,000
$32
$21
$11
55,000
$605,000
$35
$21
$14
35,000
$490,000
aRaw materials + Direct labor + Variable overhead + Variable selling and administrative = $8 + 4
+ 2 + 7= $21
b.
Household
Commercial
Total
Contribution margin
$480,000
$900,000
$1,380,000
Direct fixed expenses
(400,000)
(500,000)
(900,000)
Segment margin
$80,000
$400,000
$480,000
Selling and admin fixed
(600,000)
Operating income
($120,000)
8-44
Case 8-33, continued
Regular
Special order
Total
Sales price
$30
$20.00
Variable costs
21
17.80a
Contribution margin/unit
$9
2.20
Units sold
95,000
80,000
Total contribution margin
$855,000
$176,000
$1,031,000
a($21 – $3.20)
8-45
Case 8-33, continued
e. The outsourcing arrangement makes financial sense only if the
contribution margin is higher than the planned total contribution
the quality and timeliness of delivery for the outsourced Household
product is as good or better than what Karpet Kleen does now.
f.
Units sold
Household
50,000
Commercial
35,000
Total
Sales revenue ($23/$35)
$1,150,000
$1,225,000
$2,375,000
Variable costs ($16/$21)
(800,000)
(735,000)
(1,535,000)
Contribution margin
350,000
$490,000
840,000
Direct fixed costs
(400,000)
(500,000)
(900,000)
Segment margin
($50,000)
($10,000)
(60,000)
Fixed selling and
administrative costs
(600,000)
Operating income
($660,000)
8-46
Case 8-33, continued
hires will need to be trained, and the community outcry is likely to add
to the company’s woes. It would be best to keep operating and work
8-47
Case 8-34
In section 3 of the statement, members are instructed to mitigate
actual conflicts of interest. Wilson’s bonus based on cost savings is
such a conflict of interest, though it is not necessarily one that
prejudices his judgment. However, the appearance of a conflict may
appear to be self-serving.
If Wilson truly believes this outsourcing arrangement is in the best
interest of the organization and shareholders, he needs to investigate
the proposed system without using private information, and
benchmarking against other hospitals.