PROBLEM 22.3A
GIANT CHEF EQUIPMENT COMPANY (concluded)
b.
c.
Incremental revenue ($900,000 × 5%) 45,000$
Less: Incremental variable costs ($45,000 × 50%) 22,500
Less: Incremental increase in fixed costs 15,000
Incremental increase in responsibility margin 7,500$
Sales volume required for a $500,000 monthly responsibility margin in the Home
Products Division may be computed as follows:
The decision to increase monthly advertising expenditures is supported by the
following calculations:
60 Minutes, Strong PROBLEM 22.4A
MUSCLE BOUND CO.
a. Responsibility income statement of MUSCLE BOUND COMPANY
the Eastern Territory: Responsibility Income Statement
Eastern Territory
For January
Eastern Territory FasTrak RowMaster
Dollars Percent Dollars Percent Dollars Percent
Sales
1,350,000$ 100.0 600,000$ 100.0 750,000$ 100.0
Variable costs 720,000 53.0 270,000 45.0 450,000 60.0
b. Responsibility income statement of MUSCLE BOUND COMPANY
the entire company: Responsibility Income Statement
For January
Entire Company Eastern Territory Western Territory
Dollars Percent Dollars Percent Dollars Percent
Sales
1,950,000$ 100.0 1,350,000$ 100.0 600,000$ 100.0
Variable costs 990,000 50.8 720,000 53.0 270,000 45.0
Fixed costs traceable to territories 480,000 24.6 350,000** 26.0 130,000 21.7
Division responsibility margin 480,000$ 24.6 280,000$ 21.0% 200,000$ 33.3%
Common fixed costs 180,000 9.2
Operating income 300,000$ 15.4%
Fixed costs traceable to product lines 230,000 17.0 80,000 13.0 150,000 20.0
Product responsibility margin 400,000$ 30.0 250,000$ 42.0% 150,000$ 20.0%
Common fixed costs 120,000 9*
Operating income 280,000$ 21.0%
PROBLEM 22.4A
MUSCLE BOUND CO. (concluded)
c. Each territory’s return on assets:
Eastern Western
Territory Territory
d.
e.
FasTrak RowMaster
Incremental revenue 120,000$ 120,000$
Less: Incremental variable costs (45%, 60%) 54,000 72,000
Less: Incremental fixed costs 50,000 50,000
f.
All costs are traceable at some level of the organization. While the $120,000 in “common”
The manager should focus the campaign on the product line that will generate the greatest
contribution margin in relation to the additional fixed advertising cost. Thus, the manager
should support advertising of FasTrak, as shown below:
In the type of long-run investment described, top management must be aware of the ability
of the investment to cover fixed costs as well as variable costs. Thus, management should
look to such measures as responsibility margin and return on assets. As management knows
PROBLEM 22.5A
BUTTERFIELD, INC.
a. Computation of expected change in responsibility margin:
(1) Product A (2) Product B
Expected increase in sales 30,000$ 30,000$
Product contribution margin ratio × 48% × 36%
b.
c.
d.
When an increase in revenue requires new manufacturing facilities, the revenue must be
In the Division 1 responsibility income statement, this $21,000 in costs was classified as
“common” because the costs could not be traced to the subunits within the division.
An increase in the monthly sales of Division 2 to $200,000 represents a $50,000 increase
Expected increase in contribution margin 14,400$ 10,800$
PROBLEM 22.5A
BUTTERFIELD, INC. (concluded)
e. BUTTERFIELD, INC.
Income Statement by Divisions
For the Month Ended April 30
Divisions
Butterfield, Inc. Division 1 Division 2
Dollars Percent Dollars Percent Dollars Percent
Sales
500,000$ 100 300,000$ 100 200,000$ 100
Variable costs 240,000 48 180,000 60 60,000 30
260,000$ 52 120,000$ 40 140,000$ 70
Division responsibility margin 125,000$ 25 57,000$ 19 68,000$ 34
Income from operations 80,000$ 16
PROBLEM 22.6A
FLYWIZ, INC.
a.
b.
c.
15 Minutes, Easy
Based solely on the financial data given, closure of the Rod Division would have increased
It is very possible that the Rod Division contributes to the sales volume of the Reel Division.
The Rod Division has a contribution margin ratio of 50% ($13,000 ÷ $26,000). Thus, for
20 Minutes, Easy PROBLEM 22.7A
TOTS-TO-GO COMPANY
a.
Entire Seat Stroller
Company Division Division
Sales (1) $4,200,000 $2,400,000 $3,000,000
Entire Company Variable Costs = (20,000 units × $95) + (10,000 units × $75) =
$2,650,000
b.
Entire Seat Stroller
Company Division Division
Entire Company Variable Costs = (20,000 units × $95) + (10,000 × $75) = $2,650,000
c.
Using the market price, the contribution margins for each division and for the company as a
whole:
If division managers are evaluated and rewarded based on their division’s contribution
margin, the transfer price becomes an important issue of concern. However, it is important
Using the discount price, the contribution margins for each division and for the company as
a whole:
PROBLEM 22.8A
SPARTA AND ASSOCIATES
a.
Entire Green White
Company Division Division
Sales (1) 525,000$ 300,000$ 450,000$
Variable Costs (2) 242,500 130,000 337,500
b.
Entire Green White
Company Division Division
Sales (1) 525,000$ 277,500$ 450,000$
Variable Costs (2) 242,500 130,000 315,000
40 Minutes, Medium
Using the market price, the pre-tax operating profit for each division and for the company as
a whole:
Using the discount price, the pre-tax operating profit for each division and for the company
as a whole:
PROBLEM 22.8A
SPARTA AND ASSOCIATES (concluded)
c.
d.
Entire Green White
Company Division Division
Sales (1) 750,000$ 300,000$ 450,000$
Variable Costs (2) 482,500 130,000 352,500
Transfer prices generate accounting entries that show the flow of goods between
Using the external sale price and purchase price for the trophy base, the pre-tax
operating profit for each division and for the company as a whole:
SOLUTIONS TO PROBLEMS SET B
PROBLEM 22.1B
FASTENERS INC.
a. FASTENERS INC.
Responsibility Income Statement
For the Current Month
Entire Company Zippers Line Buckles Line
Dollars Percent Dollars Percent Dollars Percent
Sales
497,000$ 100% 189,000$ 100% 308,000$ 100%
Variable costs 176,400 35% 37,800 20% 138,600 45%
Contribution margin
320,600$ 65% 151,200$ 80% 169,400$ 55%
b.
c.
According to the analysis in part a, the Buckles product line is more profitable.
Due to the short term nature of such an advertising campaign, fixed production costs will most likely not be affected. The effects
20 Minutes, Easy
Fixed costs traceable to product lines 218,400 44% 126,000 67% 92,400 30%
Product responsibility margin 102,200$ 21% 25,200$ 13% 77,000$ 25%
Income from operations 53,200$ 11%
30 Minutes, Medium PROBLEM 22.2B
BROWN ENTERPRISES
a. Responsibility income statement:
Entire Company Bag Line Shoe Line
Dollars Percent Dollars Percent Dollars Percent
Sales
1,800,000$ 100% 1,200,000$ 100% 600,000$ 100%
Variable costs 900,000 50% 720,000 60% 180,000 30%
BROWN ENTERPRISES
Responsibility Income Statement
For the Current Month
Product responsibility margin 270,000$ 15% 180,000$ 15% 90,000$ 15%
Common fixed costs 90,000 5%
Income from operations 180,000$ 10%
PROBLEM 22.2B
BROWN ENTERPRISES (concluded)
b.
Bags Shoes
Expected increase in contribution margin:
c. Results of investment in each product line:
Bags Shoes
Expected increase in contribution margin:
Because of the relatively high contribution margin ratio in the shoe segment, spending
Thus, it would appear that an investment in the Shoe line would produce the most
profitable results. The contribution margin ratio of the Bag line is considerably less than
Recommendations on increased advertising:.
It appears that increasing advertising expenditures on shoes will increase the profitability
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
Variable costs 7,950,000 59.0 4,650,000 62.0 3,300,000$ 55.0
Contribution margin 5,550,000$ 41.0 2,850,000 38.0 2,700,000$ 45.0
GLASSWARE COMPANY
For August
Responsibility Income Statement
Division responsibility margin 3,150,000$ 23.0 1,650,000$ 22.0% 1,500,000$ 25.0%
Common fixed costs 100,000 1.0
Operating income 3,050,000$ 22.6%
PROBLEM 22.3B
GLASSWARE COMPANY (concluded)
b.
c.
Incremental revenue ($6,000,000 × 4%) 240,000$
Increase in contribution margin 108,000$
Sales volume required for a $1,600,000 monthly responsibility margin in the Clear Glass
Division may be computed as follows:
The decision to increase monthly advertising expenditures is supported by the following
calculations: