Chapter 25: Q14E (page 1412)
Refer to Exercise E25-13. Assume that Video Avenue can avoid $39,000 of direct fixed costs by dropping the DVD product line. Prepare a differential analysis to show whether Video Avenue should stop selling DVDs.
Yes, the company should drop the DVDproduct line
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What are sunk costs? Give an example.
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?
Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials \(5.00
Direct labor 3.00
Variable overhead 6.00
Fixed overhead 7.00
Manufacturing product cost \)21.00
Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
Explain the difference between price-takers and price-setters.
When is nonfinancial information relevant?
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