ACCT 202 Study Guide - Final Guide: Net Income, Contribution Margin, Income Statement
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GP Company sells logo sports merchandise and does customembroidery. They are trying to decide whether or not to continueembroidery. The following information is available for thesegments. Assume that all direct fixed costs could be avoided if asegment is dropped and that the total common fixed costs wouldremain unchanged if the embroidery were dropped.
Embroidery | Apparel Sales | |
Sales | $120,000 | $420,000 |
Variable Costs | $90,000 | $220,000 |
Contribution Margin | $30,000 | $200,000 |
Direct Fixed Costs | $18,000 | $70,000 |
Allocated Common Fixed costs | $20,000 | $70,000 |
Net Income | ($8,000) | $60,000 |
a. What would bethe impact on profits if embroidery was dropped?
b. Assume that ifembroidery was dropped, apparel sales would increase
20%. Now what is the impact on profits if embroidery isdropped?
c. Give an exampleof a cost that is not relevant in this analysis
Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal.
Mohaveâs information related to the Sand Trap line is shown below.
Segmented Income Statement for Mohaveâs | ||||||||||||||||||
Sand Trap Beach Umbrella Products | ||||||||||||||||||
Indigo | Verde | Azul | Total | |||||||||||||||
Sales revenue | $ | 60,000 | $ | 60,000 | $ | 30,000 | $ | 150,000 | ||||||||||
Variable costs | 34,000 | 31,000 | 26,000 | 91,000 | ||||||||||||||
Contribution margin | $ | 26,000 | $ | 29,000 | $ | 4,000 | $ | 59,000 | ||||||||||
Less: Direct Fixed costs | 1,900 | 2,500 | 2,000 | 6,400 | ||||||||||||||
Segment margin | $ | 24,100 | $ | 26,500 | $ | 2,000 | $ | 52,600 | ||||||||||
Common fixed costs* | 17,840 | 17,840 | 8,920 | 44,600 | ||||||||||||||
Net operating income (loss) | $ | 6,260 | $ | 8,660 | $ | (6,920 | ) | $ | 8,000 | |||||||||
*Allocated based on total sales revenue
Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.
Required:
1-a. Complete the table given below, if Mohave Corp drops the Azul line. (Do not round intermediate calculations. Round Common Fixed Costs to the nearest whole dollar.)
1-b. Will Mohaveâs net operating income increase or decrease if the Azul model is eliminated? By how much?
2. Should Mohave drop the Azul model?
3-a. Complete the table given below assuming that Mohave had no direct fixed overhead in its production information and the entire $51,000 of fixed cost was common fixed cost.
3-b. Should it the drop Azul model?
3-c. What is the increase or decrease in the net operating income of Mohave?