1.
Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines.
1.
Explanation of Solution
Tactical decision making: Tactical decision making is a process in which the company can choose the correct alternative based on the profitability. In tactical decision making, offer price of a product is compared with the normal selling price and offer price less than the normal selling price of product is considered as the idle capacity for decision making.
Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines as follows:
| Particulars | Corporate | Wedding | Special occasion | Total |
| Revenues | $55,300 | $195,000 | $168,000 | $418,300 |
| Less: Variable costs | $22,120 | $97,500 | $50,400 | $170,020 |
| Contribution margin | $33,180 | $97,500 | $117,600 | $248,280 |
| Less: Direct fixed expense: | ||||
| Negotiating (1) | $8,000 | $24,000 | $8,000 | $40,000 |
| Setting up (2) | $6,000 | $24,000 | $30,000 | $60,000 |
| Product margin | $19,180 | $49,500 | $79,600 | $148,280 |
| Less: Common fixed expense: | ||||
| Operating expense | $75,000 | |||
| Selling expense | $55,000 | |||
| Operating income | $18,280 |
Table (1)
Product margin of three product line is less than the contribution margin and corporate line has least profit than other product line. Hence, person J should find the best product line to increase the overall profitability.
Note: Common fixed operating expense after total negotiation and setup cost is $75,000
Working note (1):
Calculate the negotiating cost for each product line.
| Particulars | Corporate | Wedding | Special occasion | Total |
| Negotiating hours (E) | 400 | 1,200 | 400 | 2,000 |
| Total cost of negotiating (F) | $40,000 | $40,000 | $40,000 | $40,000 |
|
Negotiating cost | $8,000 | $24,000 | $8,000 | $40,000 |
Table (2)
Working note (2):
Calculate the setting up cost for each product line.
| Particulars | Corporate | Wedding | Special occasion | Total |
| Setting up hours (E) | 100 | 400 | 500 | 1,000 |
| Total cost of negotiating (F) | $60,000 | $60,000 | $60,000 | $60,000 |
|
Negotiating cost | $6,000 | $24,000 | $30,000 | $60,000 |
Table (3)
2.
Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment.
2.
Explanation of Solution
Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment as follows:
| Particulars | Corporate | Wedding | Special occasion | Total |
| Revenues |
$41,475 (3) | $224,250 (4) | $184,800 (5) | $450,525 |
| Less: Variable costs | $17,696 | $97,500 | $55,440 | $170,636 |
| Contribution margin | $23,779 | $126,750 | $129,360 | $279,889 |
| Less: Direct fixed expense: | ||||
| Negotiating (1) | $8,000 | $24,000 | $8,000 | $40,000 |
| Setting up (2) | $6,000 | $24,000 | $30,000 | $60,000 |
| Product margin | $9,779 | $78,750 | $91,360 | $179,889 |
| Less: Common fixed expense: | ||||
| Operating expense | $75,000 | |||
| Selling expense | $55,000 | |||
| Operating income | $49,889 |
Table (4)
In this case, product marine of corporate line is less than the other two lines. If Person J does not expect the corporate event, then Person J should drop the corporate line and concentrate to increase the profitability of other two product lines.
Working note (3):
Calculate the new revenue for corporate line.
Working note (4):
Calculate the new revenue for wedding line.
Working note (5):
Calculate the new revenue for special occasion line.
Working note (6):
Calculate the new variable expense for corporate line.
Working note (7):
Calculate the new variable expense for special occasion line.
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Chapter 17 Solutions
EBK CORNERSTONES OF COST MANAGEMENT
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