978-1260153132 Chapter 6 Part 7

Solutions Manual, Chapter 6 61

Problem 6-26 (continued)

4. The following points should be brought to management’s attention:

a. Sales in the West are much lower than in the other two regions. This

b. The West is spending about half as much for advertising as the

c. The East apparently is selling a large amount of low-margin items.

d. The East appears to be overstaffed. Its salaries are about 50%

e. The East is not covering its own traceable costs. Attention should be

f. Apparently, the salespeople in all three regions are on a salary basis.

62 Managerial Accounting, 16th Edition

Problem 6-27 (30 minutes)

1. Because of soft demand for the Brazilian Division’s product, the

inventory should be drawn down to the minimum level of 50 units.

Drawing inventory down to the minimum level would require production

as follows during the last quarter:

Desired inventory, December 31 ………. 50 units

This plan would save inventory carrying costs such as storage (rent,

insurance), interest, and obsolescence.

The number of units scheduled for production will not affect the

reported net operating income or loss for the year if variable costing is

in use. All fixed manufacturing overhead cost will be treated as an

2. To maximize the Brazilian Division’s operating income, Mr. Cavalas could

produce as many units as storage facilities will allow. By building

inventory to the maximum level, Mr. Cavalas would be able to defer a

portion of the year’s fixed manufacturing overhead costs to future years

through the inventory account, rather than having all of these costs

appear as charges on the current year’s income statement. Building

inventory to the maximum level of 1,000 units would require production

as follows during the last quarter:

Desired inventory, December 31 …. 1,000 units

Solutions Manual, Chapter 6 63

Problem 6-27 (continued)

3. By setting a production schedule that will maximize his division’s net

operating income—and maximize his own bonus—Mr. Cavalas would be

acting against the best interests of the company as a whole. The extra

The company’s bonus plan undoubtedly is intended to increase the

company’s profits by increasing sales and controlling expenses. If Mr.

In sum, producing as much as possible so as to maximize the division’s

64 Managerial Accounting, 16th Edition

Problem 6-28 (45 minutes)

1.

Total

Company

Cook–

book

Travel

Guide

Handy

Speller

Sales ………………………………. $300,000 $90,000 $150,000 $60,000

V

ariable expenses:

Printin

g

cost …………………… 102,000 27,000 63,000 12,000

Sales commissions …………… 30,000 9,000 15,000 6,000

T

raceable fixed expenses:

A

dvertisin

g

…………………….. 36,000 13,500 19,500 3,000

Salaries …………………………. 33,000 18,000 9,000 6,000

T

Common fixed expenses:

General sales ………………….. 18,000

General administration ……… 42,000

—

T

* $9,000 × 30%, 50%, and 20%, respectively.

** 48,000 square feet × $3 per square foot = $144,000; $144,000 ÷ 12

Solutions Manual, Chapter 6 65

Problem 6-28 (continued)

2. a. No, the cookbook line should not be eliminated. The cookbook is

covering all of its own costs and is generating an $18,000 segment

b.

Coo

k

–

book

T

ravel

Guide

Handy

Speller

Contribution mar

g

in (a) ……………… $54,000 $72,000 $42,000

g

It is probably unwise to focus all available resources on promoting the

travel guide. The company is already spending more on the

promotion of this product than on the other two products combined.

Furthermore, the travel guide has the lowest contribution margin ratio

of the three products. Therefore, a dollar of sales of the travel guide

66 Managerial Accounting, 16th Edition

Case 6-29 (45 minutes)

1. a. Under variable costing, only the variable manufacturing costs are included in product costs.

Y

ear

1

Y

ear

2

Y

ear

3

Direct materials ……………………………… $32 $32 $32

V

1. b. The variable costing income statements appear below:

Y

ear 1

Y

ear 2

Y

ear 3

Sales (@ $75 per unit) …………………………………..……

.

$6,000,000 $6,750,000 $5,625,000

V

ariable expenses:

Variable cost of

g

oods sold @ $56 per unit …………….

.

4,480,000 5,040,000 4,200,000

Variable sellin

g

and administrative @ $3 per unit …….

.

240,000 270,000 225,000

T

otal variable expenses …………………………………..…..

.

4,720,000 5,310,000 4,425,000

.

T

2.a. and 2.b.

The answers to 2a and 2b are the same as 1a and 1b because the unit product costs are the same

Solutions Manual, Chapter 6 67

Case 6-29 (continued)

3. a. The unit product costs under absorption costing:

Y

ear

1

Ye

ar

2

Y

ear

3

Direct materials ……………………………… $32.00 $32.00 $32.00

Direct labor …………………………………… 20.00 20.00 20.00

V

ariable manufacturin

g

overhead ………. 4.00 4.00 4.00

A

3. b. The absorption costing income statements appear below (FIFO):

Y

ear

1

Y

ear

2

Y

ear

3

Sales (@ $75 per unit) ……………………… $6,000,000 $6,750,000 $5,625,000

Cost of

g

oods sold …………………………… 5,008,000 5,788,000 4,821,500

Gross mar

g

in ………………………………….. 992,000 962,000 803,500

Sellin

g

and administrative expenses

68 Managerial Accounting, 16th Edition

Case 6-29 (continued)

4. a. The unit product costs under absorption costing:

Y

ear

1

Y

ear

2

Y

ear

3

Direct materials ……………………………… $32.00 $32.00 $32.00

Direct labor …………………………………… 20.00 20.00 20.00

V

ariable manufacturin

g

overhead ………. 4.00 4.00 4.00

A

4. b. The absorption costing income statements appears below (LIFO):

Y

ear

1

Y

ear

2

Y

ear

3

Sales ……………………………………………. $6,000,000 $6,750,000 $5,625,000

Cost of

g

oods sold …………………………… 5,008,000 5,799,000 4,818,750

Gross mar

g

in ………………………………….. 992,000 951,000 806,250

Solutions Manual, Chapter 6 69

Case 6-30 (75 minutes)

1. See the segmented statement on the second following page.

Supporting computations for the statement are given below:

Sales:

Membership dues (20,000 × $100) …………………….. $2,000,000

A

ssi

g

ned to Ma

g

azine Subscriptions Division

A

g

Reports and texts (28,000 × $25) ………………………. $ 700,000

Continuin

g

education courses:

T

Salary and personnel costs:

Salaries

Personnel Costs

(25% of Salaries)

Membership Division ………………… $210,000 $ 52,500

Ma

g

azine Subscriptions Division ….. 150,000 37,500

Books and Reports Division………… 300,000 75,000

g

T

70 Managerial Accounting, 16th Edition

Case 6-30 (continued)

Some may argue that, except for the $50,000 in rental cost directly

attributed to the Books and Reports Division, occupancy costs are

common costs that should not be allocated. The correct treatment of

Occupancy costs ($230,000 allocated + $50,000 direct to the Books

and Reports Division = $280,000):

A

llocated to:

Membership Division

($230,000 × 0.2) ……………………………………. $ 46,000

Ma

g

azine Subscriptions Division

($230,000 × 0.2) ……………………………………. 46,000

g

T

A

ssi

g

ned to:

Ma

g

azine Subscriptions Division

(22,500 × $7) ……………………………………… $157,500

Books and Reports Division

(28,000 × $4) ……………………………………… 112,000 269,500

Remainder

—

Continuin

g

Education Division …… $ 50,500

A

g

—