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PROBLEM 7-19 Second Stage Allocations and Product Margins [LO7-4, L07-5] Pixel Studio, Inc., is a small company that creates computer-generated animations for films and television. Much of the company's work consists of short commercials for television, but the com- pany also does realistic computer animations for special effects in movies The young founders of the company have become increasingly concerned with the eco- nomics of the business particularly since many competitors have sprung up recently in the local area. To help understand the company's cost structure, an activity-based costing system has been designed. Three major activities are carried out in the company: animation concept, animation production, and contract administration. The animation concept activity is carried out at the contract proposal stage when the company bids on projects. This is an intensive activity that involves individuals from all parts of the company in creating story boards and prototype stills to be shown to the prospective client. Once a project is accepted by the client, the anima- tion goes into production and contract administration begins. Almost all of the work involved in animation production is done by the technical staff, whereas the administrative staff is largely responsible for contract administration. The activity cost pools and their activity measures are listed below: Activity Cost Pool Activity Measure Activity Rate Animation concept ............. Animation production Contract administration .......... Number of proposals Minutes of completed animation Number of contracts $6,040 per proposal $7,725 per minute $6,800 per contract These activity rates include all of the company's costs, except for the costs of idle capacity and organization-sustaining costs. There are no direct labor or direct materials costs. Preliminary analysis using these activity rates has indicated that the local commercial seg- ment of the market may be unprofitable. This segment is highly competitive. Producers of local commercials may ask three or four companies like Pixel Studio to bid, which results in an unusu- ally low ratio of accepted contracts to bids. Furthermore, the animation sequences tend to be much shorter for local commercials than for other work. Since animation work is billed at fairly standard rates according to the running time of the completed animation, this means that the revenues from these short projects tend to be below average. Data concerning activity in the local commercial market appear below: Local Commercials Activity Measure Number of proposals .... Minutes of completed animation ... Number of contracts .. Doa The total sales from the 10 contracts for local commercials was $180,000. Required: 1. Determine the cost of serving the local commercial market. 2. Prepare a report showing the margin earned serving the local commercial market. (Remem- ber, this company has no direct materials or direct labor costs.) 3. What would you recommend to management concerning the local commercial market?
PROBLEM 12-19 Dropping or Retaining a Segment [L012-2] Jackson County Senior Services is a nonprofit organization devoted to providing essential ser- vices to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors-home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow: Home Nursing Meals On Wheels House- keeping Total $900,000 490,000 410,000 $260,000 120.000 140,000 $400,000 210,000 190,000 $240,000 160,000 80,000 Revenues ..... Variable expenses ............ Contribution margin ..... Fixed expenses: Depreciation ..... Liability insurance....... .. Program administrators' salaries ... General administrative overhead" ...... Total fixed expenses ........ ...... Net operating income (loss) ............. "Allocated on the basis of program revenues. 68,000 42,000 115,000 180.000 8,000 20,000 40.000 52.000 40,000 7,000 38,000 80,000 165,000 $ 25,000 20.000 15,000 37,000 48,000 120,000 $140,000 405,000 $ 5,000 120,000 $ 20,000 The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization's finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are represen- tative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program. The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided. Required: 1. Should the Housekeeping program be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services.
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