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Managerial Accounting Assignment 3.docx

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University of Ottawa
Fodil Adjaoud

Yasemin Piyale-Sheard Student Number: 6470605 ADM2341A Fall 2012 Managerial Accounting – Assignment 3 1. Contribution Margin Income Statement Product A Product B Total Sales 1,600,000 2,800,000 4,400,000 Variable Costs VM 800,000 1,680,000 2,480,000 Commissions 240,000 420,000 660,000 Total Variable Cost 1,040,000 2,100,000 3,140,000 CM 560,000 700,000 1,260,000 Traceable FC Advertising 150,000 200,000 350,000 Other (traceable costs) 180,000 180,000 360,000 Total Traceable Fixed Costs 330,000 380,000 710,000 Segment Margin 230,000 320,000 550,000 Common Fixed Cost - - 400,000 Operating Income 150,000 CALCULATIONS: *Common Fixed Cost = (350,000 - 180,000) + (410,000 - 180,000) = $400,000 *Contribution Margin (CM) = Sales - TVC = 4,400,000 - 3,140,000 = $1,260,000 * Segment Margin (SM) = CM - Total Traceable Fixed Costs = 1,260,000 - 710,000 = $550,000 * Operating Income = Segment Margin - Common Fixed Cost = 550,000 - 400,000 = $150,000 2. The “old” operating income without discontinuing product A is $150,000. If we discontinue the production and sale of Product A, we would lose the contribution margin of product A of $560,000, or in other words, we would lose the sales, and gain the total variable costs of product A. We would save the total traceable fixed cost of $330,000, and overall we would lose the segment margin of $230,000. Old Operating Income 150,000 Lose Contribution Margin (560,000 )Save Total Traceable Fixed Costs 330,000 Overall we lose Segment Margin (230,000) New Operating Income = (80,000) According to the quantitative analysis, our decision would be to not drop product A. The decrease in income would be the equivalent to the segment margin of the discontinued product A. The change in annual operating income due to this decision will be 150,000 – 230,000 = - 80,000. Answer: the change in annual operating income if the company dropped the sale and production of product A would be a loss of $80,000. 3. If Adm2341 Co. drops product A, the impact in operating income next year due to this decision will be a decrease due to the loss of the segment margin of product A of $230,000, and an increase of the contribution margin of product B of 50,000. Answer: the impact in operating income next year due to this decision will be a loss of 180,000. Decrease due to loss of SM of product A (230,000) Increase in product B's CM 50,000 Decrease to Operating Income (180,000) New product B Segment Mar
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