Chapter 25: 25-3RQ (page 1406)
What makes information irrelevant to decision making?
Information is considered irrelevant if the same does not impact thedecision-making process.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
What is the most common constraint faced by merchandisers?
What is differential analysis?
Nautical manufactures flotation vests in Tampa, Florida. Nauticalโs contribution margin income statement for the month ended December 31, 2018, contains the following data:
NAUTICAL
Income Statement
For the Month Ended December 31, 2018
Sales in Units 29,000
Net Sales Revenue \(551,000
Variable Costs:
Manufacturing 116,000
Selling and Administrative 111,000
Total Variable Costs 227,000
Contribution Margin 324,000
Fixed Costs:
Manufacturing 123,000
Selling and Administrative 92,000
Total Fixed Expenses 215,000
Operating Income \)109,000
Suppose Water Works wishes to buy 4,800 vests from Nautical. Nautical will not incur any variable selling and administrative expenses on the special order. The Nautical plant has enough unused capacity to manufacture the additional vests. Water Works has offered \(15 per vest, which is below the normal sales price of \)19.
Requirements
1. Identify each cost in the income statement as either relevant or irrelevant to Nauticalโs decision.
2. Prepare a differential analysis to determine whether Nautical should accept this special sales order.
3. Identify long-term factors Nautical should consider in deciding whether to accept the special sales order.
Members of the board of directors of Security Check have received the following operating income data for the year ended May 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 360,000 | \) 380,000 | \( 740,000 |
Cost of Goods Sold: | |||
Variable | 37,000 | 47,000 | 84,000 |
Fixed | 260,000 | 63,000 | 323,000 |
Total Cost of Goods Sold | 297,000 | 110,000 | 407,000 |
Gross Pro๏ฌt | 63,000 | 270,000 | 333,000 |
Selling and Administrative Expenses: | |||
Variable | 64,000 | 73,000 | 137,000 |
Fixed | 44,000 | 26,000 | 70,000 |
Total Selling and Administrative Expenses | 108,000 | 99,000 | 207,000 |
Operating Income (Loss) | \) (45,000) | \( 171,000 | \) 126,000 |
Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(80,000 and decrease fixed selling and administrative expenses by \)12,000.
Requirements
1. Prepare a differential analysis to show whether Security Check should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Checkโs total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternativesโ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
Refer to Exercise E25-18. Cool Systems needs 79,000 optical switches. By outsourcing them, Cool Systems can use its idle facilities to manufacture another product that will contribute $225,000 to operating income.
Requirements
1. Identify the expected net costs that Cool Systems will incur to acquire 79,000 switches under three alternative plans: make the switches, buy the switches and leave facilities idle, buy the switches and use the idle facilities to make another product.
2. Which plan makes the best use of Cool Systemโs facilities? Support your answer.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
