Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY) outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and 54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model. Revenues Variable costs Fixed costs allocated to products Operating profit (loss) 36 Inch $ 372,200 231,600 147,230 $ (6,630) 44 Inch $ 574,400 285,680 225,464 $ 63,256 54 Inch $ 352,200 163,500 138,806 $ 49,894 If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 25 percent. Required: a. Prepare a differential cost schedule to support your recommendation. b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?

Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY) outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and 54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model. Revenues Variable costs Fixed costs allocated to products Operating profit (loss) 36 Inch $ 372,200 231,600 147,230 $ (6,630) 44 Inch $ 574,400 285,680 225,464 $ 63,256 54 Inch $ 352,200 163,500 138,806 $ 49,894 If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 25 percent. Required: a. Prepare a differential cost schedule to support your recommendation. b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter16: Advanced Topics Concerning Complex Auditing Judgments

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Concept explainers

Master Budget

A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.

Sales Budget and Selling

A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.

Question

Lamothe Kitchen and Bath makes products for the home, which it sells through major retailers and remodeling (do-it-yourself, or DIY)
outlets. One product that has had varying success is a ceiling fan for the kitchen. The fan comes in three sizes (36-Inch, 44-Inch, and
54-Inch), which are designed for various kitchen sizes and cooling requirements. The chief financial officer (CFO) at Lamothe has been
looking at the segmented income statement for the fan and is concerned about the results for the 36-inch model.
Revenues
Variable costs
Fixed costs allocated to products
Operating profit (loss)
36 Inch
$ 372,200
231,600
147,230
$ (6,630)
If the 36-Inch model is dropped, the revenue associated with it would be lost and the related variable costs saved. In addition, the
company's total fixed costs would be reduced by 25 percent.
Required A Required B
Required:
a. Prepare a differential cost schedule to support your recommendation.
b. Should Lamothe Kitchen and Bath should drop the 36-Inch model product line?
Complete this question by entering your answers in the tabs below.
Revenue
Less variable costs
Contribution margin
Less fixed costs
Operating profit
44 Inch
$ 574,400
285,680
225,464
$ 63,256
Status Quo
54 Inch
$ 352,200
163,500
138,806
$ 49,894
Prepare a differential cost schedule to support your recommendation. (Select option "increase" or "decrease", keeping Status
Quo as the base. Select "none" if there is no effect.)
Alternative:
Drop
36-Inch Fan
< Required A
Difference
Required B
>

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