Chapter 25: 25-5RQ (page 1406)
When is nonfinancial information relevant?
The non-financial information is considered relevant when managers are required to makequalitative decisionsassociated with the business.
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What are sunk costs? Give an example.
When completing a differential analysis, when are the differences shown as positive amounts? As negative amounts?
Mary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates’s payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions—payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system.
Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting:
The current payroll software that was purchased for \(4,000 three years ago would not be needed if payroll processing were outsourced.
Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form that is given to the payroll processing service. She is paid \)450 per week.
Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is \(42,000.
The payroll processing service would charge \)2,000 per month.
Requirements
1. Would outsourcing the payroll function increase or decrease Duck Associates’ operating income?
2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tan’s decision if she wants to do what is best for Duck Associates and act ethically?
Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:
Per Unit
Deluxe Toothbrush Standard Toothbrush
Sales price \(86 \)56
Variable costs 20 18
Contribution margin \(66 \)38
Contribution margin ratio 76.7% 67.9%
After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.
Requirements
1. Identify the constraining factor for Brinn.
2. Prepare an analysis to show which product line to emphasize.
Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:
Direct materials \(500
Direct labor 1,000
Variable manufacturing overhead 200
Fixed manufacturing overhead 1,200
Total manufacturing cost \)2,900
Number of cakes ÷ 100
Cost per cake \(29
Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for \)25.
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