Prepare a 1-2 page double spaced memo to the company president, David Morgan (a former top salesperson with no accounting education), recommending the best choice in the following scenario: You have recently been hired as the controller for Sit-Anywhere, a manufacturer of benches used in public parks. The company produces three models with their customizable stainless-steel benches being their fastest growing product. While the company is moderately profitable, its overhead has been growing faster than its sales which has you concerned. The company prices all three products at a 50% margin and has historically allocated fixed costs based on direct labor hours. The figures produced for the last quarter by the previous controller are as follows: Standard Standard Custom Total $ 500,000 $ 1,000,000 $ 1,000,000 $ 2,500,000 1,250,000 1,250,000 Wood Steel Stainless Sales Variable Costs 250,000 500,000 500,000 Cont. Margin 250,000 500,000 500,000 Fixed Costs: DLH 10,000 20,000 20,000 50,000 Alloc. Fixed Costs 1,200,000 $ 10,000 $ 20,000 $ 20,000 $ 50,000 240,000 480,000 480,000 Net Income Based on preliminary discussions you have had with managers in the company, you find that half of the $1.200,000 in overhead is related to the engineering department. Of this $600,000, two-thirds can be attributed to the custom stainless products due to all the engineering work that is required for each sale. The remaining one-third of the engineering costs are split evenly between the standard wood and standard steel products. Assuming the other half of the $1.200,000 in overhead can still be allocated based on direct labor hours, how would this new activity-based allocation change the net income by product line? What potential strategies can you suggest that might improve the results from the company's fastest growing product line?
Prepare a 1-2 page double spaced memo to the company president, David Morgan (a former top salesperson with no accounting education), recommending the best choice in the following scenario: You have recently been hired as the controller for Sit-Anywhere, a manufacturer of benches used in public parks. The company produces three models with their customizable stainless-steel benches being their fastest growing product. While the company is moderately profitable, its overhead has been growing faster than its sales which has you concerned. The company prices all three products at a 50% margin and has historically allocated fixed costs based on direct labor hours. The figures produced for the last quarter by the previous controller are as follows: Standard Standard Custom Total $ 500,000 $ 1,000,000 $ 1,000,000 $ 2,500,000 1,250,000 1,250,000 Wood Steel Stainless Sales Variable Costs 250,000 500,000 500,000 Cont. Margin 250,000 500,000 500,000 Fixed Costs: DLH 10,000 20,000 20,000 50,000 Alloc. Fixed Costs 1,200,000 $ 10,000 $ 20,000 $ 20,000 $ 50,000 240,000 480,000 480,000 Net Income Based on preliminary discussions you have had with managers in the company, you find that half of the $1.200,000 in overhead is related to the engineering department. Of this $600,000, two-thirds can be attributed to the custom stainless products due to all the engineering work that is required for each sale. The remaining one-third of the engineering costs are split evenly between the standard wood and standard steel products. Assuming the other half of the $1.200,000 in overhead can still be allocated based on direct labor hours, how would this new activity-based allocation change the net income by product line? What potential strategies can you suggest that might improve the results from the company's fastest growing product line?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Prepare a 1-2 page double spaced memo to the company president, David Morgan (a former top
salesperson with no accounting education), recommending the best choice in the following scenario:
You have recently been hired as the controller for Sit-Anywhere, a manufacturer of benches used in public
parks. The company produces three models with their customizable stainless-steel benches being their
fastest growing product. While the company is moderately profitable, its overhead has been growing faster
than its sales which has you concermed.
The company prices all three products at a 50% margin and has historically allocated fixed costs based on
direct labor hours. The figures produced for the last quarter by the previous controller are as follows:
Standard
Standard
Custom
Wood
Steel
Stainless
Total
Sales
$ 500,000 $ 1,000,000 $ 1,000,000 $ 2,500,000
Variable Costs
250,000
500,000
250,000
500,000
500,000
500,000
1,250,000
1,250,000
Cont. Margin
Fixed Costs:
DLH
10,000
20,000
20,000
50,000
Alloc. Fixed Costs
240,000
480,000
1,200,000
$ 10,000 S
480,000
20,000 $ 20,000 $ 50,000
Net Income
Based on preliminary discussions you have had with managers in the company, you find that half of the
$1.200,000 in overhead is related to the engineering department. Of this S600,000, two-thirds can be
attributed to the custom stainless products due to all the engineering work that is required for each sale.
The remaining one-third of the engineering costs are split evenly between the standard wood and
standard steel products.
Assuming the other half of the $1.200,000 in overhead can still be allocated based on direct labor hours,
how would this new activity-based allocation change the net income by product line? What potential
strategies can you suggest that might improve the results from the company's fastest growing product
line?
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