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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.

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter11: Strategic Cost Management
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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.
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.
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