P5.3 (LO 1, 2, 3, 4, 5), AN A value-driven car manufacturer, Dryvz, started its business more than 50 years ago, making and selling a sedan body style. Sedans were popular at the time, and this one drove the success of Dryvz for years due to its practical yet stylish nature. As times changed, Dryvz designed models in different body styles, and those models have outpaced sedans, as follows. Sedan SUV Truck Van Sales $1,200,000 $4,200,000 $3,900,000 $2,000,000 Variable costs 700,000 2,000,000 1,800,000 1,100,000 Contribution margin 500,000 2,200,000 2,100,000 900,000 Fixed costs 800,000 900,000 1,200,000 800,000 Operating income (loss) $(300,000) $1,300,000 $ 900,000 $ 100,000 The income statements above reflect the second consecutive year the sedan category has lost money. Dryvz is concerned about dropping this vehicle, however, since the company's success was originally built on it. Required a. Dryvz believes it can save $600,000 in fixed costs associated with the sedans if it drops that vehicle cat- egory. Should the company seriously consider dropping it? How much better or worse off, financially, would it be by dropping the sedan? b. What qualitative considerations would Dryvz need to address before dropping the sedan line? c. Assume that 75% of the fixed costs shown in the original information, for all product lines, are direct fixed costs. The remaining fixed costs are common fixed costs, allocated to the product lines according to their sales volumes. Recast the product-line income statements detailing the direct and allocated fixed costs for each, including a subtotal for segment margin and an overall total column. d. Based on your analysis for part (c), what will happen to the allocated costs if Dryvz drops the sedans? What will happen to overall operating income? Are any of the other vehicle lines now in jeopardy of losing money? Explain.
P5.3 (LO 1, 2, 3, 4, 5), AN A value-driven car manufacturer, Dryvz, started its business more than 50 years ago, making and selling a sedan body style. Sedans were popular at the time, and this one drove the success of Dryvz for years due to its practical yet stylish nature. As times changed, Dryvz designed models in different body styles, and those models have outpaced sedans, as follows. Sedan SUV Truck Van Sales $1,200,000 $4,200,000 $3,900,000 $2,000,000 Variable costs 700,000 2,000,000 1,800,000 1,100,000 Contribution margin 500,000 2,200,000 2,100,000 900,000 Fixed costs 800,000 900,000 1,200,000 800,000 Operating income (loss) $(300,000) $1,300,000 $ 900,000 $ 100,000 The income statements above reflect the second consecutive year the sedan category has lost money. Dryvz is concerned about dropping this vehicle, however, since the company's success was originally built on it. Required a. Dryvz believes it can save $600,000 in fixed costs associated with the sedans if it drops that vehicle cat- egory. Should the company seriously consider dropping it? How much better or worse off, financially, would it be by dropping the sedan? b. What qualitative considerations would Dryvz need to address before dropping the sedan line? c. Assume that 75% of the fixed costs shown in the original information, for all product lines, are direct fixed costs. The remaining fixed costs are common fixed costs, allocated to the product lines according to their sales volumes. Recast the product-line income statements detailing the direct and allocated fixed costs for each, including a subtotal for segment margin and an overall total column. d. Based on your analysis for part (c), what will happen to the allocated costs if Dryvz drops the sedans? What will happen to overall operating income? Are any of the other vehicle lines now in jeopardy of losing money? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
100%
Transcribed Image Text:P5.3 (LO 1, 2, 3, 4, 5), AN A value-driven car manufacturer, Dryvz, started its business more than 50 years
ago, making and selling a sedan body style. Sedans were popular at the time, and this one drove the success of
Dryvz for years due to its practical yet stylish nature. As times changed, Dryvz designed models in different body
styles, and those models have outpaced sedans, as follows.
SUV
$4,200,000
Sedan
Truck
Van
Sales
$1,200,000
$3,900,000
$2,000,000
Variable costs
700,000
2,000,000
1,800,000
1,100,000
Contribution margin
500,000
2,200,000
2,100,000
900,000
Fixed costs
800,000
900,000
1,200,000
800,000
Operating income (loss)
$(300,000)
$1,300,000
$ 900,000
$ 100,000
The income statements above reflect the second consecutive year the sedan category has lost money. Dryvz
is concerned about dropping this vehicle, however, since the company's success was originally built on it.
Required
a. Dryvz believes it can save $600,000 in fixed costs associated with the sedans if it drops that vehicle cat-
egory. Should the company seriously consider dropping it? How much better or worse off, financially,
would it be by dropping the sedan?
b. What qualitative considerations would Dryvz need to address before dropping the sedan line?
c. Assume that 75% of the fixed costs shown in the original information, for all product lines, are direct fixed
costs. The remaining fixed costs are common fixed costs, allocated to the product lines according to their
sales volumes. Recast the product-line income statements detailing the direct and allocated fixed costs for
each, including a subtotal for segment margin and an overall total column.
d. Based on your analysis for part (c), what will happen to the allocated costs if Dryvz drops the sedans?
What will happen to overall operating income? Are any of the other vehicle lines now in jeopardy of losing
money? Explain.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education