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Required: a-1. At current level of sales, compute the effect of net operating income if the Model A1 table is dropped. in net operating income by $ 1-b. Would you recommend that the model A1 table be dropped? Yes O No 2. What would sales of the model A1 table have to be, at minimum, in order to justify retaining the product? (Hint. Set this up as a break-even problem, but include only the relevant costs from Requirement (1).) (Round "Contribution margin ratio" to 2 decimal places and final answer to the nearest whole number.) Sales volume $

Required: a-1. At current level of sales, compute the effect of net operating income if the Model A1 table is dropped. in net operating income by $ 1-b. Would you recommend that the model A1 table be dropped? Yes O No 2. What would sales of the model A1 table have to be, at minimum, in order to justify retaining the product? (Hint. Set this up as a break-even problem, but include only the relevant costs from Requirement (1).) (Round "Contribution margin ratio" to 2 decimal places and final answer to the nearest whole number.) Sales volume $

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Problem 9-2 Deciding Whether to Add or Drop a Product (LO1-CC3) (Algo) Pam LaRose is the chief executive of Sturdy Furniture Inc. (SFI), which makes top-quality office furniture. LaRose would like advice concerning the advisability of eliminating the model A1 table. This table has been among the company's best-selling products, but it seems unprofitable. A condensed statement of operating income for the company and for the model A1 table for the quarter ended September 30 follows: Model A1 table All Products Sales Cost of sales: $1,300,000* $5,900,000 Direct materials 520,000 1,534,000 Direct labour 312,000 1,357,000 Fringe benefits (20% of direct labour) Variable manufacturing overhead 62,400 271,400 15,600 59,000 Building rent and maintenance 16,900 59,000 Depreciation Total cost of sales Gross margin Selling and administrative expenses: Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping General administrative expenses Total selling and administrative expenses 83,200 147,500 1,010,100 3,427,900 289,900 2,472,100 42,900 147,500 65,000 295,000 21,580 88,500 20,000 236,000 208,000 944,000 357,480 1,711,000 Net operating income (loss) R (67,580) R 761,100 The following additional data have been supplied by the company: a. Direct labour is a variable cost at SFI. b. All of the company's products are manufactured in the same facility and use the same equipment. Building rent, maintenance and depreciation are allocated to products using various bases. The equipment does not wear out through use; it eventually becomes obsolete. c. There is ample capacity to fill all orders. d. Dropping the model A1 table would have no effect on sales of other product lines. e. Inventories of work in process or finished goods are insignificant. f. Shipping costs are traced directly to products. g. General administrative expenses are allocated to products on the basis of sales dollars. There would be no effect on the total general administrative expenses if the model A1 table was dropped. h. If the model A1 table was dropped, the product manager would be laid off. Required: a-1. At current level of sales, compute the effect of net operating income if the Model A1 table is dropped. in net operating income by $ 1-b. Would you recommend that the model A1 table be dropped? Yes ○ No 2. What would sales of the model A1 table have to be, at minimum, in order to justify retaining the product? (Hint. Set this up as a break-even problem, but include only the relevant costs from Requirement (1).) (Round "Contribution margin ratio" to 2 decimal places and final answer to the nearest whole number.) Sales volume $
Transcribed Image Text:Problem 9-2 Deciding Whether to Add or Drop a Product (LO1-CC3) (Algo) Pam LaRose is the chief executive of Sturdy Furniture Inc. (SFI), which makes top-quality office furniture. LaRose would like advice concerning the advisability of eliminating the model A1 table. This table has been among the company's best-selling products, but it seems unprofitable. A condensed statement of operating income for the company and for the model A1 table for the quarter ended September 30 follows: Model A1 table All Products Sales Cost of sales: $1,300,000* $5,900,000 Direct materials 520,000 1,534,000 Direct labour 312,000 1,357,000 Fringe benefits (20% of direct labour) Variable manufacturing overhead 62,400 271,400 15,600 59,000 Building rent and maintenance 16,900 59,000 Depreciation Total cost of sales Gross margin Selling and administrative expenses: Product managers' salaries Sales commissions (5% of sales) Fringe benefits (20% of salaries and commissions) Shipping General administrative expenses Total selling and administrative expenses 83,200 147,500 1,010,100 3,427,900 289,900 2,472,100 42,900 147,500 65,000 295,000 21,580 88,500 20,000 236,000 208,000 944,000 357,480 1,711,000 Net operating income (loss) R (67,580) R 761,100 The following additional data have been supplied by the company: a. Direct labour is a variable cost at SFI. b. All of the company's products are manufactured in the same facility and use the same equipment. Building rent, maintenance and depreciation are allocated to products using various bases. The equipment does not wear out through use; it eventually becomes obsolete. c. There is ample capacity to fill all orders. d. Dropping the model A1 table would have no effect on sales of other product lines. e. Inventories of work in process or finished goods are insignificant. f. Shipping costs are traced directly to products. g. General administrative expenses are allocated to products on the basis of sales dollars. There would be no effect on the total general administrative expenses if the model A1 table was dropped. h. If the model A1 table was dropped, the product manager would be laid off. Required: a-1. At current level of sales, compute the effect of net operating income if the Model A1 table is dropped. in net operating income by $ 1-b. Would you recommend that the model A1 table be dropped? Yes ○ No 2. What would sales of the model A1 table have to be, at minimum, in order to justify retaining the product? (Hint. Set this up as a break-even problem, but include only the relevant costs from Requirement (1).) (Round "Contribution margin ratio" to 2 decimal places and final answer to the nearest whole number.) Sales volume $
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