Chapter 17, Problem 17E

1.

To determine

Prepare a segment income statement using the activity data and explain the suggestion about the relative profitability of the three product lines.

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 $75,000$\left(\$175,000-\$100,000\right)$.

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 $\left(\frac{E}{Totalnegotiatinghours}\times F\right)$	$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 $\left(\frac{E}{Totalnegotiatinghours}\times F\right)$	$6,000	$24,000	$30,000	$60,000

Table (3)

2.

To determine

Prepare a new segment income statement based on the given situation and state the suggestion about dropping the corporate segment.

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.

$\begin{array}{c}\text{Revenue = }\left(\begin{array}{l}\text{Revenue for corporate line}\times \\ \left(100\%-\text{Decreased percentage}\right)\end{array}\right)\\ =\$55,300\times \left(100\%-25\%\right)\\ =\$41,475\end{array}$

Working note (4):

Calculate the new revenue for wedding line.

$\begin{array}{c}\text{Revenue = }\left(\begin{array}{l}\text{Revenue for wedding line}\times \\ \left(100\%+\text{Increased percentage}\right)\end{array}\right)\\ =\$195,000\times \left(100\%+15\%\right)\\ =\$224,250\end{array}$

Working note (5):

Calculate the new revenue for special occasion line.

$\begin{array}{c}\text{Revenue = }\left(\begin{array}{l}\text{Revenue for special occasion line}\times \\ \left(100\%+\text{Increased percentage}\right)\end{array}\right)\\ =\$168,000\times \left(100\%+10\%\right)\\ =\$184,800\end{array}$

Working note (6):

Calculate the new variable expense for corporate line.

$\begin{array}{c}\text{Variable expense = }\left(\begin{array}{l}\text{Variable cost for corporate line}\times \\ \left(100\%-\text{Decreased percentage}\right)\end{array}\right)\\ =\$22,120\times \left(100\%-20\%\right)\\ =\$17,696\end{array}$

Working note (7):

Calculate the new variable expense for special occasion line.

$\begin{array}{c}\text{Variable expense = }\left(\begin{array}{l}\text{Variable cost for special occasion line}\times \\ \left(100\%+\text{Increased percentage}\right)\end{array}\right)\\ =\$50,400\times \left(100\%+10\%\right)\\ =\$55,440\end{array}$